10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 2006

or

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)

State of Incorporation: Delaware I.R.S. Employer Identification No. 72-1235413

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

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

Securities registered pursuant to Section 12(b) of the Act:

	Name of each exchange
Title of each class	on which registered
Common Stock, Par Value $.01 Per Share	New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

o Yes       þ No

     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

o Yes       þ No

     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.

þ Yes o No

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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

Large accelerated filer þ       Accelerated filer o       Non-accelerated filer o

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

o Yes       þ No

     The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $1,203,747,622 as of June 30, 2006 (based on the last reported sale price of such stock on the New York Stock Exchange Composite Tape on that day).

     As of February 14, 2007, the registrant had outstanding 27,949,958 shares of Common Stock, par value $.01 per share.

     Document incorporated by reference: Portions of the Definitive Proxy Statement of Stone Energy Corporation relating to the Annual Meeting of Stockholders to be held on May 17, 2007 are incorporated by reference into Part III of this Form 10-K.

TABLE OF CONTENTS

		Page No.
	PART I
Item 1.	Business		3
Item 1A.	Risk Factors		8
Item 1B.	Unresolved Staff Comments		13
Item 2.	Properties		14
Item 3.	Legal Proceedings		17
Item 4.	Submission of Matters to a Vote of Security Holders		18
Item 4A.	Executive Officers of the Registrant		19
	PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		20
Item 6.	Selected Financial Data		22
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		23
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		31
Item 8.	Financial Statements and Supplementary Data		32
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		32
Item 9A.	Controls and Procedures		32
Item 9B.	Other Information		34
	PART III
Item 10.	Directors, Executive Officers and Corporate Governance		36
Item 11.	Executive Compensation		36
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		36
Item 13.	Certain Relationships and Related Transactions and Director Independence		36
Item 14.	Principal Accountant Fees and Services		36
	PART IV
Item 15.	Exhibits and Financial Statement Schedules		37
	Index to Financial Statements		F-1
	Glossary of Certain Industry Terms		G-1
Restated Bylaws
Amendment No. 4 and Waiver to the Credit Agreement
Amendment No. 5 to the Credit Agreement
Subsidiaries
Consent of Independent Registered Public Accounting Firm
Consent of Netherland, Sewell & Associates, Inc.
Consent of Ryder Scott Company, L.P.
Certification of Principal Executive Officer
Certification of Principal Financial Officer
Certification Pursuant to 18 U.S.C. Section 1350

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PART I

     This section highlights information that is discussed in more detail in the remainder of the document. Throughout this document we make statements that are classified as “forward-looking.” Please refer to the “Forward-Looking Statements” section beginning on page 7 of this document for an explanation of these types of statements. We use the terms “Stone”, “Stone Energy”, “company”, “we”, “us” and “our” to refer to Stone Energy Corporation. Certain terms relating to the oil and gas industry are defined in “Glossary of Certain Industry Terms”, which begins on page G-1 of this Form 10-K.

ITEM 1. BUSINESS

The Company

     Stone Energy is an independent oil and natural gas company engaged in the acquisition and subsequent exploration, development, operation and production of oil and gas properties located in the conventional shelf of the Gulf of Mexico (the “GOM”), the deep shelf of the GOM, the deepwater of the GOM, the Rocky Mountain Basins and the Williston Basin. Stone is also engaged in an exploratory joint venture in Bohai Bay, China. Our corporate headquarters are located at 625 E. Kaliste Saloom Road, Lafayette, Louisiana 70508.

Available Information

     We make available free of charge on our Internet web site (www.stoneenergy.com) our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other filings pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and amendments to such filings, as soon as reasonably practicable after each are electronically filed with, or furnished to, the Securities and Exchange Commission (the “SEC”). In addition, the public may read and copy any materials filed by us with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, D.C. 20549. You may obtain information on the operation of the public reference room by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. We also make available on our Internet web site our Code of Business Conduct and Ethics, Corporate Governance Guidelines, and Audit, Compensation and Nominating and Governance Committee Charters, respectively, which have been approved by our board of directors. We will make immediate disclosure by a Current Report on Form 8-K and on our web site of any change to, or waiver from, the Code of Business Conduct and Ethics for our principal executive and senior financial officers. A copy of our Code of Business Conduct and Ethics is also available, free of charge by writing us at: Chief Financial Officer, Stone Energy Corporation, P.O. Box 52807, Lafayette, LA 70505. The annual CEO certification required by Section 303A.12 of the New York Stock Exchange Listed Company Manual was submitted on June 6, 2006.

Strategy and Operational Overview

     Since our public offering in 1993, we have been engaged in the acquisition, exploration and development of mature oil and gas properties in the Gulf Coast Basin, which includes onshore Louisiana and offshore GOM. During 2004, we broadened our conventional shelf acquisition and exploitation strategy in order to diversify, extend reserve life and take advantage of a strong oil and gas market. This broadened growth strategy included targeting reserves and production in the deep shelf and deep water of the GOM, furthering our position in the Rocky Mountain Region (Rocky Mountain Basins and Williston Basin) to complement our existing portfolio of properties in the Gulf Coast Basin (onshore, shelf and deep shelf) and investigating viable opportunities in other areas including international areas. In December 2006, we announced that our Board of Directors had approved and endorsed a strategic plan to re-focus on our Gulf of Mexico conventional shelf properties. As part of this strategy, we expect to divest selected properties in the Rocky Mountain Region and the Gulf Coast Basin in 2007. We anticipate that the proceeds from the planned asset sales would be used to materially reduce our debt. As part of this renewed strategy, we anticipate further investment in our assets in Bohai Bay, China in 2007 to bring the project to evaluation. Additionally, we anticipate pursuing alternatives in the deep water Gulf of Mexico on a selected basis. As of February 14, 2007, our property portfolio consisted of 56 active properties and 60 primary term leases in the Gulf Coast Basin and 21 active properties in the Rocky Mountain Region.

     As of December 31, 2006, we had estimated proved reserves of approximately 590.9 billion cubic feet of natural gas equivalent (“Bcfe”), 71% of which were classified as proved developed and 58% of which were natural gas. For the year ended December 31, 2006, we produced an average of 211 million cubic feet of natural gas equivalent (“MMcfe”) per day. During 2006, we generated net cash flow from operating activities of $399.0 million.

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     Gulf of Mexico — Conventional Shelf (Including Onshore Louisiana)

     Our conventional shelf strategy is the same acquisition and exploitation combination that we adopted prior to our initial public offering in 1993. We apply the latest geophysical interpretation tools to identify underdeveloped properties and the latest production techniques to increase production attributable to these properties. We seek to acquire properties that have the following characteristics:

• mature properties with an established production history and infrastructure;

• multiple productive sands and reservoirs;

• low production levels at acquisition with significant identified proven and potential reserves; and

• opportunity for us to obtain a controlling interest and serve as operator.

     Prior to acquiring a property, we perform a thorough geological, geophysical and engineering analysis of the property to formulate a comprehensive development plan. We also employ our extensive technical database, which includes both 3-Dimensional and 4-Component seismic data. After we acquire a property, we seek to increase cash flow from existing reserves and establish additional proved reserves through the drilling of new wells, workovers and recompletions of existing wells and the application of other techniques designed to increase production.

     Gulf of Mexico — Deep Water/ Deep Shelf

     We believe that the deep water of the GOM is an important exploration area, even though it involves high risk, high costs and substantial lead time to develop infrastructure. We have made a significant investment in seismic data and have assembled a technical team with prior geological, geophysical and engineering experience in the deep water arena to evaluate potential opportunities. During 2006, we drilled one deep water well, which was not successful. As of yet, we have no production or reserves in the deep water of the GOM.

     Our current property base also contains multiple deep shelf exploration opportunities in the GOM, which are defined as prospects below 15,000 feet. The deep shelf presents higher risk with high potential opportunities that have existing infrastructure, which shortens the lead time to production. We believe our existing property base creates the opportunity for a portfolio approach to the deep shelf.

     Rocky Mountain Basins

     Our assets in the Rocky Mountain Basins represented 9% of our total production in 2006 and 25% of our total estimated proved reserves (on a volumetric basis) at December 31, 2006. Our Rocky Mountain Basins include positions in the Wind River and Greater Green River Basins in Wyoming and Uinta Basin in Utah. A substantial portion of our Rocky Mountain Basin reserves have been targeted for potential sale in 2007.

     Williston Basin

     Our Williston Basin assets represented 6% of our total production in 2006 and 6% of our total estimated proved reserves (on a volumetric basis) at December 31, 2006. A substantial portion of our Williston Basin reserves have been targeted for potential sale in 2007.

     International

     During 2006, we entered into an agreement to participate in the drilling of two exploratory wells on two offshore concessions in Bohai Bay, China. After the drilling of the two wells it has been determined that additional drilling will be necessary to evaluate the commercial viability of this project. We have the potential to earn an interest in 750,000 acres on these two concessions.

Oil and Gas Marketing

     Our oil and natural gas production is sold at current market prices under short-term contracts. Conoco, Inc., Sequent Energy Management LP and Shell Trading (US) Company, each accounted for between 10%-13% of oil and natural gas revenue generated during the year ended December 31, 2006. No other purchaser accounted for 10% or more of our total oil and natural gas revenue during 2006. We believe that the loss of any of our major purchasers would not result in a material adverse effect on our ability to market future oil and gas production. From time to time, we may enter into transactions that hedge the price of oil and natural gas. See “Item 7A. Quantitative and Qualitative Disclosures About Market Risk – Commodity Price Risk.”

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Competition and Markets

     Competition in the Gulf Coast Basin and the Rocky Mountain Region is intense, particularly with respect to the acquisition of producing properties and undeveloped acreage. We compete with major oil and gas companies and other independent producers of varying sizes, all of which are engaged in the acquisition of properties and the exploration and development of such properties. Many of our competitors have financial resources and exploration and development budgets that are substantially greater than ours, which may adversely affect our ability to compete. See “Item 1A. Risk Factors – Competition within our industry may adversely affect our operations.”

     The availability of a ready market for and the price of any hydrocarbons produced will depend on many factors beyond our control, including but not limited to the amount of domestic production and imports of foreign oil and liquefied natural gas, the marketing of competitive fuels, the proximity and capacity of oil and natural gas pipelines, the availability of transportation and other market facilities, the demand for hydrocarbons, the effect of federal and state regulation of allowable rates of production, taxation and the conduct of drilling operations, and federal regulation of oil and natural gas. In addition, the restructuring of the natural gas pipeline industry eliminated the gas purchasing activity of traditional interstate gas transmission pipeline buyers. Producers of natural gas have therefore been required to develop new markets among gas marketing companies, end users of natural gas and local distribution companies. All of these factors, together with economic factors in the marketing arena, generally may affect the supply of and/or demand for oil and natural gas and thus the prices available for sales of oil and natural gas.

Regulation

     Our U.S. oil and gas operations are subject to various U.S. federal, state and local laws and regulations.

     Various aspects of our oil and natural gas operations are regulated by administrative agencies of the states where such operations are conducted and by certain agencies of the federal government for operations on federal leases. All of the jurisdictions in which we own or operate producing oil and natural gas properties have statutory provisions regulating the exploration for and production of oil and natural gas, including provisions requiring permits for the drilling of wells and maintaining bonding requirements in order to drill or operate wells, and provisions relating to the location of wells, the method of drilling and casing wells, the surface use and restoration of properties upon which wells are drilled, and the abandonment of wells. Our operations are also subject to various conservation laws and regulations. These include the regulation of the size of drilling and spacing units or proration units and the number of wells that may be drilled in an area and the unitization or pooling of oil and natural gas properties. In this regard, some states can order the pooling or integration of tracts to facilitate exploration while other states rely on voluntary pooling of lands and leases. In addition, state conservation laws establish maximum rates of production from oil and natural gas wells, generally prohibit the venting or flaring of natural gas, and impose certain requirements regarding the ratability or fair apportionment of production from fields and individual wells.

     Certain operations that we conduct are on federal oil and gas leases, which are administered by the Bureau of Land Management (the “BLM”) and the Minerals Management Service (the “MMS”). These leases contain relatively standardized terms and require compliance with detailed BLM and MMS regulations and orders pursuant to the Outer Continental Shelf Lands Act (the “OCSLA”) (which are subject to change by the MMS). Many onshore leases contain stipulations limiting activities that may be conducted on the lease. Some stipulations are unique to particular geographic areas and may limit the times during which activities on the lease may be conducted, the manner in which certain activities may be conducted or, in some cases, may ban any surface activity. For offshore operations, lessees must obtain MMS approval for exploration, development and production plans prior to the commencement of such operations. In addition to permits required from other agencies (such as the U.S. Environmental Protection Agency), lessees must obtain a permit from the BLM or the MMS, as applicable, prior to the commencement of drilling, and comply with regulations governing, among other things, engineering and construction specifications for production facilities, safety procedures, plugging and abandonment of wells on the Outer Continental Shelf (the “OCS”) of the GOM, calculation of royalty payments and the valuation of production for this purpose, and removal of facilities. To cover the various obligations of lessees on the OCS, the MMS generally requires that lessees post substantial bonds or other acceptable assurances that such obligations will be met, unless the MMS exempts the lessee from such obligations. The cost of such bonds or other surety can be substantial, and we can provide no assurance that we can continue to obtain bonds or other surety in all cases. Under certain circumstances, the BLM or MMS, as applicable, may require our operations on federal leases to be suspended or terminated. Any such suspension or termination could materially and adversely affect our financial condition and operations.

     In August, 2005, Congress enacted the Energy Policy Act of 2005 (“EPAct 2005”). Among other matters, EPAct 2005 amends the Natural Gas Act (“NGA”) to make it unlawful for “any entity”, including otherwise non-jurisdictional producers such as Stone Energy, to use any deceptive or manipulative device or contrivance in connection with the purchase or sale of natural gas or the purchase or sale of transportation services subject to regulation by the Federal Energy Regulatory Commission (“FERC”), in contravention of rules prescribed by the FERC. On January 20, 2006, the FERC issued rules implementing this provision. The rules make it unlawful in connection with the purchase or sale of natural gas subject to the jurisdiction of the FERC, or the purchase or sale of transportation services subject to the jurisdiction of the FERC, for any entity, directly or indirectly, to use or employ any device, scheme or artifice to defraud; to make any untrue statement of material fact or omit to make any such statement necessary to make the statements made not misleading; or to engage in any act or practice that operates as a fraud or deceit upon any person. EPAct 2005 also gives the FERC

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authority to impose civil penalties for violations of the NGA up to $1,000,000 per day per violation. The new anti-manipulation rule does not apply to activities that relate only to intrastate or other non-jurisdictional sales or gathering, but does apply to activities of otherwise non-jurisdictional entities to the extent the activities are conducted “in connection with” gas sales, purchases or transportation subject to FERC jurisdiction. It therefore reflects a significant expansion of the FERC’s enforcement authority. Stone Energy does not anticipate it will be affected any differently than other producers of natural gas.

     Additional proposals and proceedings that might affect the oil and gas industry are regularly considered by Congress, states, the FERC and the courts. We cannot predict when or whether any such proposals may become effective. In the past, the oil and natural gas industry has been heavily regulated. We can give no assurance that the regulatory approach currently pursued by the FERC or any other agency will continue indefinitely. We do not anticipate, however, that compliance with existing federal, state and local laws, rules and regulations will have a material or significantly adverse effect on our financial condition, results of operations or competitive position. No portion of our business is subject to renegotiation of profits or termination of contracts or subcontracts at the election of the federal government.

Environmental Regulation

     As a lessee and operator of onshore and offshore oil and gas properties in the United States, we are subject to stringent federal, state and local laws and regulations relating to environmental protection as well as controlling the manner in which various substances, including wastes generated in connection with oil and gas industry operations, are released into the environment. Compliance with these laws and regulations require the acquisition of permits authorizing air emissions and wastewater discharge from operations and can affect the location or size of wells and facilities, limit or prohibit the extent to which exploration and development may be allowed, and require proper closure of wells and restoration of properties that are being abandoned. Failure to comply with these laws and regulations may result in the assessment of administrative, civil or criminal penalties, imposition of remedial obligations, incurrence of capital costs to comply with governmental standards, and even injunctions that limit or prohibit exploration and production operations or the disposal of substances generated in connection with oil and gas industry operation.

     We currently operate or lease, and have in the past operated or leased, a number of properties that for many years have been used for the exploration and production of oil and gas. Although we have utilized operating and disposal practices that were standard in the industry at the time, hydrocarbons or wastes may have been disposed of or released on or under the properties operated or leased by us or on or under other locations where such hydrocarbons or wastes have been taken for recycling or disposal. In addition, many of these properties have been operated by third parties whose treatment and disposal or release of hydrocarbons or wastes was not under our control. These properties and the hydrocarbons and wastes disposed thereon may be subject to laws and regulations imposing joint and several, strict liability, without regard to fault or the legality of the original conduct, that could require us to remove or remediate previously disposed wastes or environmental contamination, or to perform remedial plugging or pit closure to prevent future contamination.

     The Oil Pollution Act of 1990 (or “OPA”) and regulations adopted pursuant to OPA impose a variety of requirements related to the prevention of and response to oil spills into waters of the United States, including the OCS. The OPA subjects owners of oil handling facilities to strict, joint and several liability for all containment and cleanup costs and certain other damages arising from a spill, including, but not limited to, the costs of responding to a release of oil to surface waters and natural resource damages. OPA also requires owners and operators of offshore oil production facilities such as us to establish and maintain evidence of financial responsibility of at least $35 million to cover costs that could be incurred in responding to an oil spill. We believe that we are in substantial compliance with the requirements of OPA, and that these requirements are not any more burdensome to us than they are to other similarly situated oil and gas companies.

     We have made, and will continue to make, expenditures in efforts to comply with environmental laws and regulations. While we believe that we are in substantial compliance with applicable environmental laws and regulations in effect and that continued compliance with existing requirements will not have a material adverse impact on us, we also believe that it is reasonably likely that the trend in environmental legislation and regulation will continue toward stricter standards and, thus, we cannot give any assurance that we will not be adversely affected in the future. For instance, in response to recent studies suggesting that emissions of certain gases including carbon dioxide, may be contributing to warming of the Earth’s atmosphere, many foreign nations have agreed to limit emissions of these gases, generally referred to as “greenhouse gases,” pursuant to the United Nations Framework Convention on Climate Change, also known as the “Kyoto Protocol”. Although the United States is not participating in the Kyoto Protocol, the current session of Congress is considering climate control legislation, with multiple bills having already been introduced in the Senate that propose to restrict greenhouse gas emissions. By comparison, several states have already adopted legislation, regulations and/or regulatory initiatives to reduce emissions of greenhouse gases. Also, on November 29, 2006, the U.S. Supreme Court heard arguments on a case appealed from the U.S. Circuit Court of Appeals for the District Columbia, Massachusetts, et al. v. EPA, in which the appellate court held that the U.S. Environmental Protection Agency had discretion under the federal Clean Air Act to refuse to regulate carbon dioxide emissions from mobile sources. Passage of climate control legislation by Congress or a Supreme Court reversal of the appellate decision could result in federal regulation of carbon dioxide emissions and other greenhouse gases. Any federal or state restrictions on emissions of greenhouse gases that may be imposed in areas of the United States in which we conduct business could adversely affect our operations and demand for our products.

     We have established internal guidelines to be followed in order to comply with environmental laws and regulations in the United States. We employ a safety department whose responsibilities include providing assurance that our operations are carried out in

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accordance with applicable environmental guidelines and safety precautions. Although we maintain pollution insurance to cover a portion of the costs of cleanup operations, public liability and physical damage, there is no assurance that such insurance will be adequate to cover all such costs or that such insurance will continue to be available in the future. To date we believe that compliance with existing requirements of such governmental bodies has not had a material effect on our operations.

Employees

     On February 14, 2007, we had 240 full time employees. We believe that our relationships with our employees are satisfactory. None of our employees are covered by a collective bargaining agreement. Under our supervision, we utilize the services of independent contractors to perform various daily operational duties.

Forward-Looking Statements

     The information in this Form 10-K includes “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. All statements, other than statements of historical or current facts, that address activities, events, outcomes and other matters that we plan, expect, intend, assume, believe, budget, predict, forecast, project, estimate or anticipate (and other similar expressions) will, should or may occur in the future are forward-looking statements. These forward-looking statements are based on management’s current belief, based on currently available information, as to the outcome and timing of future events. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements in this Form 10-K.

     Forward-looking statements appear in a number of places and include statements with respect to, among other things:

• any expected results or benefits associated with our acquisitions;

• estimates of our future oil and natural gas production, including estimates of any increases in oil and gas production;

• planned capital expenditures and the availability of capital resources to fund capital expenditures;

• our outlook on oil and gas prices;

• estimates of our oil and gas reserves;

• any estimates of future earnings growth;

• the impact of political and regulatory developments;

• our outlook on the resolution of pending litigation and government inquiry;

• estimates of the impact of new accounting pronouncements on earnings in future periods;

• our future financial condition or results of operations and our future revenues and expenses; and

• our business strategy and other plans and objectives for future operations.

     We caution you that these forward-looking statements are subject to all of the risks and uncertainties, many of which are beyond our control, incident to the exploration for and development, production and marketing of oil and natural gas. These risks include, but are not limited to, commodity price volatility, third party interruption of sales to market, inflation, lack of availability of goods and services, environmental risks, drilling and other operating risks, hurricanes and other weather conditions, regulatory changes, the uncertainty inherent in estimating proved oil and natural gas reserves and in projecting future rates of production and timing of development expenditures and the other risks described in this Form 10-K.

     Reserve engineering is a subjective process of estimating underground accumulations of oil and natural gas that cannot be measured in an exact way. The accuracy of any reserve estimate depends on the quality of available data and the interpretation of that data by geological engineers. In addition, the results of drilling, testing and production activities may justify revisions of estimates that were made previously. If significant, these revisions would change the schedule of any further production and development drilling. Accordingly, reserve estimates are generally different from the quantities of oil and natural gas that are ultimately recovered.

     Should one or more of the risks or uncertainties described above or elsewhere in this Form 10-K occur, or should underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements. 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 us are expressly qualified in their entirety by this cautionary statement.

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ITEM 1A. RISK FACTORS

     Our business is subject to a number of risks including, but not limited to, those described below:

Oil and gas price declines and volatility could adversely affect our revenues, cash flows and profitability.

     Our revenues, cash flows, profitability and future rate of growth depend substantially upon the market prices of oil and natural gas, which fluctuate widely. Factors that can cause this fluctuation include:

• relatively minor changes in the supply of and demand for oil and natural gas;

• market uncertainty;

• the level of consumer product demands;

• hurricanes and other weather conditions;

• domestic and foreign governmental regulations;

• the price and availability of alternative fuels;

• political and economic conditions in oil producing countries, particularly those in the Middle East, Russia, South America and Africa;

• the foreign supply of oil and natural gas;

• the price of oil and gas imports; and

• overall domestic and foreign economic conditions.

     We cannot predict future oil and natural gas prices. At various times, excess domestic and imported supplies have depressed oil and gas prices. Declines in oil and natural gas prices may adversely affect our financial condition, liquidity and results of operations. Lower prices may reduce the amount of oil and natural gas that we can produce economically and may also create ceiling test write-downs of our oil and gas properties. Substantially all of our oil and natural gas sales are made in the spot market or pursuant to contracts based on spot market prices, not long-term fixed price contracts.

     In an attempt to reduce our price risk, we periodically enter into hedging transactions with respect to a portion of our expected future production. We cannot assure you that such transactions will reduce the risk or minimize the effect of any decline in oil or natural gas prices. Any substantial or extended decline in the prices of or demand for oil or natural gas would have a material adverse effect on our financial condition and results of operations.

     We may not be able to replace production with new reserves.

     In general, the volume of production from oil and gas properties declines as reserves are depleted. The decline rates depend on reservoir characteristics. Gulf of Mexico reservoirs tend to be recovered quickly through production with associated steep declines, while declines in other regions after initial flush production tend to be relatively low. During 2006, 85% of our production and 69% of our estimated proved reserves were derived from Gulf of Mexico reservoirs, while the remaining portions of our production and reserves were derived from the Rocky Mountain Region. Our reserves will decline as they are produced unless we acquire properties with proved reserves or conduct successful development and exploration drilling activities. Our future natural gas and oil production is highly dependent upon our level of success in finding or acquiring additional reserves at a unit cost that is sustainable at prevailing commodity prices.

Our actual recovery of reserves may substantially differ from our proved reserve estimates.

     This Form 10-K contains estimates of our proved oil and gas reserves and the estimated future net cash flows from such reserves. These estimates are based upon various assumptions, including assumptions required by the SEC relating to oil and gas prices, drilling and operating expenses, capital expenditures, taxes and availability of funds. The process of estimating oil and natural gas reserves is complex. This process requires significant decisions and assumptions in the evaluation of available geological, geophysical, engineering and economic data for each reservoir and is therefore inherently imprecise. Additionally, our interpretations of the rules governing the estimation of proved reserves could differ from the interpretation of staff members of regulatory authorities resulting in estimates that could be challenged by these authorities.

     Actual future production, oil and natural gas prices, revenues, taxes, development expenditures, operating expenses and quantities of recoverable oil and gas reserves will most likely vary from those estimated. Any significant variance could materially affect the estimated quantities and present value of reserves set forth in this document and the information incorporated by reference. Our properties may also be susceptible to hydrocarbon drainage from production by other operators on adjacent properties. In addition, we may adjust estimates of proved reserves to reflect production history, results of exploration and development, prevailing oil and natural gas prices and other factors, many of which are beyond our control.

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     As articulated in “Item 9A. Controls and Procedures”, management identified in 2005 a material weakness in internal controls that did not prevent the overstatement of our proved oil and gas reserves in prior periods. We made various changes in our internal controls that we believe remediate this weakness. However, we can provide no assurances that we will not experience weaknesses in controls in this area in the future.

     We may not be able to fund our planned capital expenditures.

     We spend and will continue to spend a substantial amount of capital for the acquisition, exploration, exploitation, development and production of oil and gas reserves. Our capital expenditures, including acquisitions and exclusive of estimated asset retirement costs, were $639.2 million during 2006, $479.8 million during 2005 and $501.2 million during 2004. We have budgeted total capital expenditures in 2007, excluding property acquisitions, asset retirement costs, hurricane related expenditures and capitalized salaries, general and administrative costs and interest, to be approximately $320 million. If low oil and natural gas prices, operating difficulties or other factors, many of which are beyond our control, cause our revenues and cash flows from operating activities to decrease, we may be limited in our ability to fund the capital necessary to complete our capital expenditures program. In addition, if our borrowing base under our credit facility is re-determined to a lower amount, this could adversely affect our ability to fund our planned capital expenditures. After utilizing our available sources of financing, we may be forced to raise additional debt or equity proceeds to fund such capital expenditures. We cannot assure you that additional debt or equity financing will be available or cash flows provided by operations will be sufficient to meet these requirements.

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

     As of February 14, 2007, we had $797 million in outstanding indebtedness. We have a borrowing base under our bank credit facility of $325 million with availability of an additional $100 million of borrowings as of February 14, 2007.

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

• incurring additional debt;

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

• making investments;

• creating liens on our assets;

• selling assets;

• guaranteeing other indebtedness;

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

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

• entering into transactions with affiliates.

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

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

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

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

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

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

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

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

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

9

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

We have experienced significant shut-ins and losses of production in 2004, 2005 and 2006 due to the effects of hurricanes in the Gulf of Mexico .

     Approximately 69% of our estimated proved reserves at December 31, 2006 and 85% of our production during 2006 were associated with our Gulf Coast Basin properties. Accordingly, if the level of production from these properties substantially declines, it could have a material adverse effect on our overall production level and our revenue. We are particularly vulnerable to significant risk from hurricanes and tropical storms. During 2004, we experienced an approximate 7.0 Bcfe deferral of production due to Hurricane Ivan. During 2006 and 2005, we experienced an approximate deferral of 15.6 Bcfe and 16.4 Bcfe of production, respectively, due to Hurricanes Katrina and Rita. We are unable to predict what impact future hurricanes and tropical storms might have on our future results of operations and production.

The marketability of our production depends mostly upon the availability, proximity and capacity of oil and natural gas gathering systems, pipelines and processing facilities.

     The marketability of our production depends upon the availability, proximity, operation and capacity of oil and natural gas gathering systems, pipelines and processing facilities. The unavailability or lack of capacity of these systems and facilities could result in the shut-in of producing wells or the delay or discontinuance of development plans for properties. Federal, state and local regulation of oil and gas production and transportation, general economic conditions and changes in supply and demand could adversely affect our ability to produce and market our oil and natural gas. If market factors changed dramatically, the financial impact on us could be substantial. The availability of markets and the volatility of product prices are beyond our control and represent a significant risk.

We may not receive payment for a portion of our future production.

     We may not receive payment for a portion of our future production. We have attempted to diversify our sales and obtain credit protections such as parental guarantees from certain of our purchasers. We are unable to predict, however, what impact the financial difficulties of certain purchasers may have on our future results of operations and liquidity.

Lower oil and gas prices and other factors may cause us to record ceiling test write-downs.

     We use the full cost method of accounting for our oil and gas operations. Accordingly, we capitalize the cost to acquire, explore for and develop oil and gas properties. 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. As of December 31, 2006, our ceiling test computation resulted in an after-tax write-down of $330.5 million based on a Henry Hub gas price of $5.635 per MMBtu and a West Texas Intermediate oil price of $61.05 per barrel. This charge does not impact cash flow from operating activities, but does reduce net income. The risk that we will be required to write down the carrying value of oil and gas properties increases when oil and natural gas prices are low or volatile. In addition, write-downs may occur if we experience substantial downward adjustments to our estimated proved reserves or our undeveloped property values, or if estimated future development costs increase. We cannot assure you that we will not experience additional ceiling test write-downs in the future.

We may not be able to obtain adequate financing to execute our operating strategy.

     We have historically addressed our short and long-term liquidity needs through the use of bank credit facilities, the issuance of debt and equity securities and the use of cash flow provided by operating activities. We continue to examine the following alternative sources of capital:

• bank borrowings or the issuance of debt securities;

• the issuance of common stock, preferred stock or other equity securities;

• joint venture financing; and

• production payments.

10

     The availability of these sources of capital will depend upon a number of factors, some of which are beyond our control. These factors include general economic and financial market conditions, oil and natural gas prices and our market value and operating performance. We may be unable to fully execute our operating strategy if we cannot obtain capital from these sources.

     There are uncertainties in successfully integrating our acquisitions.

     Integrating acquired businesses and properties involves a number of special risks. These risks include the possibility that management may be distracted from regular business concerns by the need to integrate operations and that unforeseen difficulties can arise in integrating operations and systems and in retaining and assimilating employees. Any of these or other similar risks could lead to potential adverse short-term or long-term effects on our operating results.

Our operations are subject to numerous risks of oil and gas drilling and production activities.

     Oil and gas drilling and production activities are subject to numerous risks, including the risk that no commercially productive oil or natural gas reservoirs will be found. The cost of drilling and completing wells is often uncertain. Oil and gas drilling and production activities may be shortened, delayed or canceled as a result of a variety of factors, many of which are beyond our control. These factors include:

• unexpected drilling conditions;

• pressure or irregularities in formations;

• equipment failures or accidents;

• hurricanes and other weather conditions;

• shortages in experienced labor; and

• shortages or delays in the delivery of equipment.

     The prevailing prices of oil and natural gas also affect the cost of and the demand for drilling rigs, production equipment and related services.

     We cannot assure you that the new wells we drill will be productive or that we will recover all or any portion of our investment. Drilling for oil and natural gas may be unprofitable. Drilling activities can result in dry wells and wells that are productive but do not produce sufficient net revenue after operating and other costs to recoup drilling costs.

Our industry experiences numerous operating risks.

     The exploration, development and production of oil and gas properties involves a variety of operating risks including the risk of fire, explosions, blowouts, pipe failure, abnormally pressured formations and environmental hazards. Environmental hazards include oil spills, gas leaks, pipeline ruptures or discharges of toxic gases. If any of these industry-operating risks occur, we could have substantial losses. Substantial losses may be caused by injury or loss of life, severe damage to or destruction of property, natural resources and equipment, pollution or other environmental damage, clean-up responsibilities, regulatory investigation and penalties and suspension of operations. Additionally, our offshore operations are subject to the additional hazards of marine operations, such as capsizing, collision and adverse weather and sea conditions. In accordance with industry practice, we maintain insurance against some, but not all, of the risks described above.

     We have begun to explore for natural gas and oil in the deep waters of the GOM (water depths greater than 2,000 feet) where operations are more difficult than in shallower waters. Our deep water drilling and operations require the application of recently developed technologies that involve a higher risk of mechanical failure. The deep waters of the GOM often lack the physical infrastructure and availability of services present in the shallower waters. As a result, deep water operations may require a significant amount of time between a discovery and the time that we can market the oil and gas, increasing the risks involved with these operations.

     We maintain insurance of various types to cover our operations, including maritime employer’s liability and comprehensive general liability. Coverage amounts are provided by primary liability policies. In addition, we maintain operator’s extra expense insurance, which provides coverage for the care, custody and control of wells drilled and/or completed plus re-drill and pollution coverage. The exact amount of coverage for each well is dependent upon its depth and location. We experienced Gulf of Mexico production interruption in 2005 and 2006 from Hurricanes Katrina and Rita for which we do not have any loss of production insurance.

     We cannot assure you that our insurance will be adequate to cover losses or liabilities. Also, we cannot predict the continued availability of insurance at premium levels that justify its purchase. No assurance can be given that we will be able to maintain insurance in the future at rates we consider reasonable. The occurrence of a significant event, not fully insured or indemnified against, could have a material adverse affect on our financial condition and operations.

11

Terrorist attacks aimed at our facilities could adversely affect our business.

     The U.S. government has issued warnings that U.S. energy assets may be the future targets of terrorist organizations. These developments have subjected our operations to increased risks. Any future terrorist attack at our facilities, or those of our purchasers, could have a material adverse affect on our financial condition and operations.

Competition within our industry may adversely affect our operations.

     Competition in the Gulf Coast Basin and the Rocky Mountain Region is intense, particularly with respect to the acquisition of producing properties and undeveloped acreage. We compete with major oil and gas companies and other independent producers of varying sizes, all of which are engaged in the acquisition of properties and the exploration and development of such properties. Many of our competitors have financial resources and exploration and development budgets that are substantially greater than ours, which may adversely affect our ability to compete.

Our oil and gas operations are subject to various U.S. federal, state and local governmental regulations that materially affect our operations.

     Our oil and gas operations are subject to various U.S. federal, state and local laws and regulations. These laws and regulations may be changed in response to economic or political conditions. Regulated matters include: permits for exploration, development and production operations; limitations on our drilling activities in environmentally sensitive areas, such as wetlands and restrictions on the way we can release materials into the environment; bonds or other financial responsibility requirements to cover drilling contingencies and well plugging and abandonment costs; reports concerning operations, the spacing of wells and unitization and pooling of properties; and taxation. Failure to comply with these laws and regulations can result in the assessment of administrative, civil, or criminal penalties, the issuance of remedial obligations, and the imposition of injunctions limiting or prohibiting certain of our operations. At various times, regulatory agencies have imposed price controls and limitations on oil and gas production. In order to conserve supplies of oil and gas, these agencies have restricted the rates of flow of oil and gas wells below actual production capacity. In addition, the OPA requires operators of offshore facilities such as us to prove that they have the financial capability to respond to costs that may be incurred in connection with potential oil spills. Under OPA and other federal and state environmental statutes like the federal Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) and Resource Conservation and Recovery Act (RCRA), owners and operators of certain defined onshore and offshore facilities are strictly liable for spills of oil and other regulated substances, subject to certain limitations. Consequently, a substantial spill from one of our facilities subject to laws such as OPA, CERCLA and RCRA could require the expenditure of additional, and potentially significant, amounts of capital, or could have a material adverse effect on our earnings, results of operations, competitive position or financial condition. Federal, state and local laws regulate production, handling, storage, transportation and disposal of oil and gas, by-products from oil and gas and other substances, and materials produced or used in connection with oil and gas operations. We cannot predict the ultimate cost of compliance with these requirements or their impact on our earnings, operations or competitive position.

     The loss of key personnel could adversely affect our ability to operate.

     Our operations are dependent upon key management and technical personnel. We cannot assure you that individuals will remain with us for the immediate or foreseeable future. The unexpected loss of the services of one or more of these individuals could have an adverse effect on us.

Hedging transactions may limit our potential gains or become ineffective.

     In order to manage our exposure to price risks in the marketing of our oil and natural gas, we periodically enter into oil and gas price hedging arrangements with respect to a portion of our expected production. Our hedging policy provides that, without prior approval of our board of directors, generally not more than 50% of our estimated production quantities may be hedged. These arrangements may include futures contracts on the New York Mercantile Exchange (“NYMEX”). While intended to reduce the effects of volatile oil and gas prices, such transactions, depending on the hedging instrument used, may limit our potential gains if oil and gas prices were to rise substantially over the price established by the hedge. In addition, such transactions may expose us to the risk of financial loss in certain circumstances, including instances in which:

• our production is less than expected or is shut-in for extended periods due to hurricanes or other factors;

• there is a widening of price differentials between delivery points for our production and the delivery point assumed in the hedge arrangement;

• the counterparties to our futures contracts fail to perform the contracts;

• a sudden, unexpected event materially impacts oil or natural gas prices; or

• we are unable to market our production in a manner contemplated when entering into the hedge contract.

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Ownership of working interests, net profits interests and overriding royalty interests in certain of our properties by certain affiliates may create conflicts of interest.

     James H. Stone, our chairman of the board of directors, owns up to 7.5% of the working interest in certain wells drilled on Section 19 of the east flank of the Weeks Island Field. This interest was acquired prior to our initial public offering in 1993. In his capacity as a working interest owner, he is required to pay a proportional share of all costs and is entitled to receive a proportional share of revenue.

     As a result of this transaction, a conflict of interest may exist between us and such director with respect to the drilling of additional wells or other development operations.

We do not pay dividends.

     We have never declared or paid any cash dividends on our common stock and have no intention to do so in the near future. The restrictions on our present or future ability to pay dividends are included in the provisions of the Delaware General Corporation Law and in certain restrictive provisions in the indenture executed in connection with our 8¹/4% Senior Subordinated Notes due 2011, 6³/4% Senior Subordinated Notes due 2014 and Senior Floating Rate Notes due 2010. In addition, we have entered into a credit facility that contains provisions that may have the effect of limiting or prohibiting the payment of dividends.

Our Certificate of Incorporation and Bylaws have provisions that discourage corporate takeovers and could prevent stockholders from realizing a premium on their investment.

     Certain provisions of our Certificate of Incorporation, Bylaws and shareholders’ rights plan and the provisions of the Delaware General Corporation Law may encourage persons considering unsolicited tender offers or other unilateral takeover proposals to negotiate with our board of directors rather than pursue non-negotiated takeover attempts. Our Bylaws provide for a classified board of directors, who are elected by plurality voting. Also, our Certificate of Incorporation authorizes our board of directors to issue preferred stock without stockholder approval and to set the rights, preferences and other designations, including voting rights of those shares, as the board may determine. Additional provisions include restrictions on business combinations and the availability of authorized but unissued common stock. These provisions, alone or in combination with each other and with the rights plan described below, may discourage transactions involving actual or potential changes of control, including transactions that otherwise could involve payment of a premium over prevailing market prices to stockholders for their common stock. Our board of directors recently considered a policy to elect directors by majority vote, but a decision was made to continue with plurality voting at this time.

     During 1998, our board of directors adopted a shareholder rights agreement, pursuant to which uncertificated stock purchase rights were distributed to our stockholders at a rate of one right for each share of common stock held of record as of October 26, 1998. The rights plan is designed to enhance the board’s ability to prevent an acquirer from depriving stockholders of the long-term value of their investment and to protect stockholders against attempts to acquire us by means of unfair or abusive takeover tactics. However, the existence of the rights plan may impede a takeover not supported by our board, including a takeover that may be desired by a majority of our stockholders or involving a premium over the prevailing stock price. This shareholder rights agreement expires on September 30, 2008.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

13

ITEM 2. PROPERTIES

     As of February 14, 2007, our property portfolio consisted of 56 active properties and 60 primary term leases in the Gulf Coast Basin and 21 active properties in the Rocky Mountain Region. We serve as operator on 60% of our active properties, including a 47% operating percentage on our Gulf Coast Basin properties and 13% operating percentage on our Rocky Mountain Region properties. The properties that we operate accounted for 69% of our year-end 2006 estimated proved reserves. This high operating percentage allows us to better control the timing, selection and costs of our drilling and production activities.

Oil and Natural Gas Reserves

     The information in this Annual Report on Form 10-K relating to our estimated oil and natural gas proved reserves is based upon reserve reports prepared as of December 31, 2006. Estimates of our Gulf Coast Basin proved reserves were prepared by Netherland, Sewell & Associates, Inc. and represent 69% of our estimated proved reserves on a volumetric basis. Estimates of our Rocky Mountain Region proved reserves were prepared by Ryder Scott Company, L.P. and represent 31% of our estimated proved reserves on a volumetric basis.

     The following table sets forth our estimated proved oil and natural gas reserves as of December 31, 2006.

					Total		Percent
	Proved Developed		Proved Undeveloped		Proved		Proved Developed
Total Company:
Oil (MBbls)		33,301		8,059		41,360		81	%
Natural gas (MMcf)		222,664		120,118		342,782		65	%
Total oil and natural gas (MMcfe)		422,470		168,472		590,942		71	%
Gulf Coast Basin:
Oil (MBbls)		27,532		5,500		33,032		83	%
Natural gas (MMcf)		168,029		42,344		210,373		80	%
Total oil and natural gas (MMcfe)		333,221		75,344		408,565		82	%
Rocky Mountain Region:
Oil (MBbls)		5,769		2,559		8,328		69	%
Natural gas (MMcf)		54,635		77,774		132,409		41	%
Total oil and natural gas (MMcfe)		89,249		93,128		182,377		49	%

     The following represents additional information on individually significant properties:

			December 31,
			2006
			Estimated
		2006	Proved	Nature of
Field Name	Location	Production	Reserves	Interest
Pinedale Vail II	Greater Green River	4.4 Bcfe	103.3 Bcfe	Working
	Basin, Wyoming USA
Mississippi Canyon Block 109	GOM Shelf	4.9 Bcfe	85.3 Bcfe	Working
Ewing Bank Block 305	GOM Shelf	6.0 Bcfe	59.8 Bcfe	Working
Sidney	Williston Basin	3.8 Bcfe	31.1 Bcfe	Working
	North Dakota USA
Main Pass Block 288	GOM Shelf	5.8 Bcfe	27.9 Bcfe	Working
South Pelto Block 23	GOM Shelf	4.8 Bcfe	25.3 Bcfe	Working
Vermilion Block 255	GOM Shelf	3.2 Bcfe	25.0 Bcfe	Working
Jonah Field	Greater Green River	1.1 Bcfe	24.5 Bcfe	Working
	Basin, Wyoming USA

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     There are numerous uncertainties inherent in estimating quantities of proved reserves and in projecting future rates of production and the timing of development expenditures, including many factors beyond the control of the producer. The reserve data set forth herein only represents estimates. Reserve engineering is a subjective process of estimating underground accumulations of oil and gas that cannot be measured in an exact way and the accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation and judgment and the existence of development plans. Results of drilling, testing and production subsequent to the date of an estimate may justify a revision of such estimate. Accordingly, reserve estimates are generally different from the quantities of oil and gas that are ultimately produced. Further, the estimated future net revenues from proved reserves and the present value thereof are based upon certain assumptions, including geological success, prices, future production levels, operating costs, development costs and income taxes that may not prove to be correct. Predictions about prices and future production levels are subject to great uncertainty, and the meaningfulness of these estimates depends on the accuracy of the assumptions upon which they are based.

     As an operator of domestic oil and gas properties, we have filed Department of Energy Form EIA-23, “Annual Survey of Oil and Gas Reserves,” as required by Public Law 93-275. There are differences between the reserves as reported on Form EIA-23 and as reported herein. The differences are attributable to the fact that Form EIA-23 requires that an operator report the total reserves attributable to wells that it operates, without regard to percentage ownership (i.e., reserves are reported on a gross operated basis, rather than on a net interest basis) or non-operated wells in which it owns an interest.

Acquisition, Production and Drilling Activity

     Acquisition and Development Costs. The following table sets forth certain information regarding the costs incurred in our acquisition, development and exploratory activities during the periods indicated.

	Year Ended December 31,
	2006		2005		2004
	(In thousands)
Acquisition costs, net of sales of unevaluated properties	$	228,108	$	138,080	$	201,550
Development costs (1)		370,201		203,577		145,111
Exploratory costs		160,371		156,472		151,571
Subtotal		758,680		498,129		498,232
Capitalized salaries, general and administrative costs and interest, net of fees and reimbursements		41,543		35,339		22,926
Total additions to oil and gas properties	$	800,223	$	533,468	$	521,158

(1) Includes asset retirement costs of $161,048, $53,687 and $19,950 for the years ended December 31, 2006, 2005 and 2004, respectively.

15

     Productive Well and Acreage Data. The following table sets forth certain statistics regarding the number of productive wells and developed and undeveloped acreage as of December 31, 2006.

	Gross		Net
Productive Wells:
Oil (1):
Gulf Coast Basin		133.00		95.24
Rocky Mountain Region		264.00		147.26
		397.00		242.50
Gas (2):
Gulf Coast Basin		114.00		66.59
Rocky Mountain Region		77.00		29.49
		191.00		96.08
Total		588.00		338.58
Developed Acres:
Gulf Coast Basin		38,835.43		24,229.37
Rocky Mountain Region		51,134.70		21,222.18
Total		89,970.13		45,451.55
Undeveloped Acres (3):
Gulf Coast Basin		550,461.20		377,705.58
Rocky Mountain Region		645,566.17		530,104.77
Total		1,196,027.37		907,810.35

(1)	12 gross wells each have dual completions.
(2)	8 gross wells each have dual completions.
(3)	Leases covering approximately 4% of our undeveloped gross acreage will expire in 2007, 9% in 2008, 6% in 2009, 21% in 2010, 7% in 2011, 3% in 2012, 1% in both 2013 and 2014 and 7% and in 2015. Leases covering the remainder of our undeveloped gross acreage (41 %) are held by production.

     Drilling Activity. The following table sets forth our drilling activity for the periods indicated.

	Year Ended December 31,
	2006				2005				2004
	Gross		Net		Gross		Net		Gross		Net
Exploratory Wells:
Productive		6.00		3.49		7.00		6.17		17.00		11.02
Nonproductive		13.00		9.26		8.00		5.17		11.00		7.78
Development Wells:
Productive		43.00		22.48		37.00		22.42		20.00		9.61
Nonproductive		1.00		0.51		6.00		2.86		3.00		2.07

Title to Properties

     We believe that we have satisfactory title to substantially all of our active properties in accordance with standards generally accepted in the oil and gas industry. Our properties are subject to customary royalty interests, liens for current taxes and other burdens, which we believe do not materially interfere with the use of or affect the value of such properties. Prior to acquiring undeveloped properties, we perform a title investigation that is thorough but less vigorous than that conducted prior to drilling, which is consistent with standard practice in the oil and gas industry. Before we commence drilling operations, we conduct a thorough title examination and perform curative work with respect to significant defects before proceeding with operations. We have performed a thorough title examination with respect to substantially all of our active properties.

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ITEM 3. LEGAL PROCEEDINGS

     We are among the defendants included in a lawsuit filed in 2004 by the State of Louisiana and the Iberia Parish School Board in Case Number 101934, Iberia Parish, Louisiana, alleging contamination and damage and seeking an undisclosed monetary sum as compensation for said damages to portions of Section 16, Township 12 South, Range 11 East in the Bayou Pigeon Field as a result of past oil and gas exploration and production activities. The Company believes it has been named as a defendant in error and intends to vigorously defend this matter.

     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 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 years 1999, 2000 and 2001. Further, on December 29, 2005, the LDR filed another petition in the 15^th Judicial District Court claiming additional franchise taxes due for the taxable years ended December 31, 2002 and 2003 in the amount of $2.6 million plus accrued interest calculated through December 15, 2005 in the amount of $1.2 million. 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. Stone has not yet been given any indication that the LDR plans to review franchise taxes for the franchise tax years 2004 and 2005.

     In 2005 Stone received notice that the staff of the SEC (the “Staff”) was conducting an informal inquiry into the revision of Stone’s proved reserves and the financial statement restatement. The Staff has also informed Stone that it is likely to obtain a formal order of investigation with its inquiry. In addition, Stone has received an inquiry from the Philadelphia Stock Exchange investigating matters including trading prior to Stone’s October 6, 2005 announcement. Stone is cooperating fully with both inquiries.

     On or around November 30, 2005, George Porch filed a putative class action in the United States District Court for the Western District of Louisiana (the “Federal Court”) against Stone, David Welch, Kenneth Beer, D. Peter Canty and James Prince purporting to allege violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. Three similar complaints were filed soon thereafter. All complaints had asserted a putative class period commencing on June 17, 2005 and ending on October 6, 2005. All complaints contended that, during the putative class period, defendants, among other things, misstated or failed to disclose (i) that Stone had materially overstated Stone’s financial results by overvaluing its oil reserves through improper and aggressive reserve methodologies; (ii) that the Company lacked adequate internal controls and was therefore unable to ascertain its true financial condition; and (iii) that as a result of the foregoing, the values of the Company’s proved reserves, assets and future net cash flows were materially overstated at all relevant times. On March 17, 2006, these purported class actions were consolidated, with El Paso Fireman & Policeman’s Pension Fund designated as Lead Plaintiff (“Securities Action”). Lead plaintiff filed a consolidated class action complaint on or about June 14, 2006. The consolidated complaint alleges claims similar to those described above and expands the putative class period to commence on May 2, 2001 and to end on March 10, 2006. On September 13, 2006, Stone and the individual defendants filed motions seeking dismissal of that action. The motion has since been fully briefed by the parties, but – as of this date – has not been decided by the Federal Court.

     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 naming Robert Farer, Priscilla Fisk and Joint Pension Fund, Local No. 164, I.B.E.W. as co-lead plaintiffs in the Federal Court derivative action and directed the lead plaintiffs to file a consolidated amended complaint within forty-five days. On April 22, 2006, the complaint in the State Court derivative action was amended to also assert claims on behalf of a purported class of shareholders of Stone. In addition to the above mentioned claims, the amended State Court derivative action complaint purported to allege breaches of fiduciary duty by the director defendants in connection with the then proposed merger transaction with Plains and seeks an order enjoining the director defendants from entering into the then proposed transaction with Plains. On May 15, 2006, the first consolidated complaint in the Federal Court derivative action was filed; it contained a similar injunctive claim. On September 15, 2006, co-lead plaintiffs’ in the Federal Court derivative action further amended their complaint to seek an order enjoining Stone’s proposed merger with EPL based on substantially the same grounds previously asserted regarding the prior proposed transaction with Plains. On October 2, 2006, each of the defendants in the Federal Court derivative action filed or joined in motions seeking dismissal of all or part of that action. Those motions were denied without prejudice on November 30, 2006 when the Federal

17

Court granted the co-lead plaintiffs leave to file a third amended complaint. Following the filing of the third amended complaint in the Federal Court derivative action, defendants filed motions seeking to have that action either dismissed or stayed until resolution of the pending motion to dismiss the Securities Action before the Federal Court. On December 21, 2006 the Federal Court stayed the Federal Court derivative action at least until resolution of the pending motion to dismiss the Securities Action after which time a hearing will be conducted by the Federal Court to determine the propriety of maintaining that stay.

     On or around August 28, 2006, ATS instituted an action (the “ATS Litigation”) in the Delaware Court of Chancery for New Castle County (the “Delaware Court”). The initial complaint in the ATS Litigation, among other things, challenged certain provisions of the EPL Merger Agreement pursuant to which EPL (i) paid the $43.5 million Plains Termination Fee; and (ii) agreed, under certain contractually specified conditions, to pay Stone $25.6 million in the event of a future termination of the Merger Agreement (the “EPL Termination Fee”). On or around September 12, 2006, a purported shareholder of EPL filed a purported class action in the Delaware Court (the “Farrington Action”). The initial Farrington Action complaint asserted claims similar to those in the ATS Litigation and sought, among other things, a damages recovery in the amount of the Plains Termination Fee.

     On or around September 7, 2006, EPL commenced an action against Stone in the Delaware Court (the “Declaratory Action”), in which EPL sought a declaratory judgment with respect to EPL’s rights and obligations under Section 6.2(e) of the Merger Agreement. On September 11, 2006, the Delaware Court expedited the Declaratory Action and consolidated with the Declaratory Action a portion of the ATS Litigation in which ATS likewise asserted claims respecting Section 6.2(e) of the Merger Agreement. By oral ruling on September 27, 2006, and subsequent written opinion dated October 11, 2006, the Delaware Court ruled, among other things, that Section 6.2(e) of the Merger Agreement did not limit the ability of EPL to explore and negotiate, in good faith, with respect to any Third Party Acquisition Proposals (as defined in the Merger Agreement), including the tender offer by ATS, Inc. for all of the outstanding shares of EPL stock at $23.00 per share (“ATS Offer”). The Delaware Court dismissed without prejudice the remainder of the claims raised by EPL in the Declaratory Action as not ripe for a judicial determination.

     On October 11, 2006, EPL and Stone entered into an agreement (the “Termination and Release Agreement”) pursuant to which they agreed, among other things, (i) to enter into a mutual termination of the Merger Agreement, (ii) to mutually release certain actual or potential claims or rights of action, (iii) to mutually seek a dismissal of the Declaratory Action, and (iv) that EPL would make a payment of $8 million to Stone (the “$8 Million Payment”). EPL made the $8 Million Payment to Stone. On October 13, 2006, the Declaratory Action was dismissed by stipulation of the parties and order of the Delaware Court.

     On or around October 16, 2006, following the execution of the Termination and Release Agreement, plaintiffs in both the ATS Litigation and the Farrington Litigation sought (and were later granted leave by the Court) to file Second Amended Complaints that, among other things, added claims seeking a recovery in the amount of the $8 Million Payment. On October 26, 2006, ATS voluntarily dismissed the ATS Litigation without prejudice, while — as of this date — the Farrington Action remains pending. On November 2, 2006, Stone and EPL filed motions to dismiss the Farrington Action. Those motions are currently pending and being briefed by the parties. The Delaware Court has yet to reach a determination as to the merits of the claims asserted in the Farrington Action with respect to the Plains Termination Fee or the $8 Million Payment.

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

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

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     No matters were submitted for a vote of our stockholders during the third or fourth quarters of 2006.

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ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT

     The following table sets forth information regarding the names, ages (as of February 14, 2007) and positions held by each of our executive officers, followed by biographies describing the business experience of our executive officers for at least the past five years. Our executive officers serve at the discretion of the board of directors.

Name	Age		Position
David H. Welch		58	President, Chief Executive Officer and Director
Kenneth H. Beer		49	Senior Vice President and Chief Financial Officer
Andrew L. Gates, III		59	Senior Vice President, General Counsel and Secretary
E. J. Louviere		58	Senior Vice President – Land
J. Kent Pierret		51	Senior Vice President, Chief Accounting Officer and Treasurer
Jerome F. Wenzel, Jr		54	Senior Vice President – Operations
Florence M. Ziegler		46	Vice President – Human Resources and Administration

     David H. Welch was appointed President, Chief Executive Officer and a director of the Company effective April 1, 2004. Prior to joining Stone, Mr. Welch served as Senior Vice President of BP America, Inc. since 2003, and Vice President of BP, Inc. since 1999.

     Kenneth H. Beer was named Senior Vice President and Chief Financial Officer in August 2005 upon the resignation of James H. Prince. He most recently served as a director of research and a senior energy analyst at the investment banking firm of Johnson Rice & Company. Prior to joining Johnson Rice in 1992, he spent five years as an energy analyst and investment banker at Howard Weil Incorporated.

     Andrew L. Gates, III was named Senior Vice President, General Counsel and Secretary in April 2004. He previously served as Vice President, General Counsel and Secretary since August 1995.

     E. J. Louviere was named Senior Vice President – Land in April 2004. Previously, he served as Vice President – Land since June 1995. He has been employed by Stone since its inception in 1993.

     J. Kent Pierret was named Senior Vice President in April 2004. Mr. Pierret previously served as Vice President and Chief Accounting Officer since June 1999 and Treasurer since February 2004. Prior to June 1999, he was a partner in the firm of Pierret, Veazey & Co., CPAs (and its predecessors) from May 1988 to May 1999, which performed a substantial amount of our financial reporting, tax compliance and financial advisory services.

     Jerome F. Wenzel, Jr. joined Stone in October 2004 as Vice President-Production and Drilling and was named Senior Vice President – Operations in September 2005. Prior to joining Stone, Mr. Wenzel held managerial and executive positions with Amoco and BP America, Inc. over a 29 year career.

          Florence M. Ziegler was named Vice President – Human Resources and Administration in September 2005. She has been employed by Stone since its inception in 1993 and served as the Director of Human Resources from 1997 to 2004.

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

     Since July 9, 1993, our common stock has been listed on the New York Stock Exchange under the symbol “SGY.” The following table sets forth, for the periods indicated, the high and low sales prices per share of our common stock.

	High		Low
2005
First Quarter	$	52.21	$	41.16
Second Quarter		51.93		40.51
Third Quarter		62.50		48.99
Fourth Quarter		61.75		42.00
2006
First Quarter	$	51.40	$	38.55
Second Quarter		51.50		40.12
Third Quarter		48.25		39.64
Fourth Quarter		40.19		34.71
2007 First Quarter (through February 14, 2007)	$	35.35	$	32.26

     On February 14, 2007, the last reported sales price on the New York Stock Exchange Composite Tape was $34.33 per share. As of that date, there were 427 holders of record of our common stock.

Dividend Restrictions

     In the past, we have not paid cash dividends on our common stock, and we do not intend to pay cash dividends on our common stock in the foreseeable future. We currently intend to retain earnings, if any, for the future operation and development of our business. The restrictions on our present or future ability to pay dividends are included in the provisions of the Delaware General Corporation Law and in certain restrictive provisions in the indentures executed in connection with our 8¹/4% Senior Subordinated Notes due 2011, 6³/4% Senior Subordinated Notes due 2014 and Senior Floating Rate Notes due 2010. In addition, our bank credit facility contains provisions that may have the effect of limiting or prohibiting the payment of dividends.

Issuer Purchases of Equity Securities

     There were no purchases of Stone’s common stock by us or on our behalf during the quarterly period ended December 31, 2006.

Equity Compensation Plan Information

     Please refer to Item 12 of this Annual Report on Form 10-K for information concerning securities authorized under our equity compensation plan.

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Stock Performance Graph

     As required by applicable rules of the Securities and Exchange Commission, the performance graph shown below was prepared based upon the following assumptions:

1.	$100 was invested in the Company’s Common Stock, the S&P 500 and the Peer Group (as defined below) on December 31, 2001 at $39.50 per share for the Company’s Common Stock and at the closing price of the stocks comprising the S&P 500 and the Peer Group, respectively, on such date.
2.	Peer Group investment is weighted based upon the market capitalization of each individual company within the Peer Group at the beginning of the period.
3.	Dividends are reinvested on the ex-dividend dates.

Measurement Period
(Fiscal Year Covered)		SGY		New Peer Group		Old Peer Group		S&P 500
	12/31/02		84.46		98.18		107.84		77.90
	12/31/03		107.47		122.27		141.03		100.25
	12/31/04		114.15		167.11		195.75		111.15
	12/31/05		115.27		246.35		295.93		116.61
	12/31/06		89.49		250.95		321.26		135.03

     The companies that comprise the Company’s current Peer Group are as follows: Bois D’Arc Energy, Cabot Oil & Gas Corporation, Callon Petroleum Company, Comstock Resources, Inc., Energy Partners, Ltd., Forest Oil Corporation, Newfield Exploration Company, St. Mary Land and Exploration Company, Swift Energy Company, The Houston Exploration Company, and W&T Offshore, Inc.

     Meridian Resource Corporation, Noble Energy Inc., Pogo Producing Company, Vintage Petroleum, Inc. and XTO Energy Inc. were removed from the Company’s Peer Group and were replaced by Bois D’Arc Energy, Comstock Resources, Inc., Energy Partners Ltd., and W&T Offshore, Inc. pursuant to resolution of the Board of Directors on February 15, 2006.

     The information in this Form 10-K appearing under the heading “Stock Performance Graph” is being “furnished” pursuant to Item 2.01(e) of Regulation S-K under the Securities Act of 1933, as amended, and shall not be deemed to be “soliciting material” or “filed” with the Securities and Exchange Commission or subject to Regulation 14A or 14C, other than as provided in Item 2.01(e) of Regulation S-K, or to the liabilities of Section 18 of the Securities Exchange Act of 1934, as amended.

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ITEM 6. SELECTED FINANCIAL DATA

     The following table sets forth a summary of selected historical financial information for each of the years in the five-year period ended December 31, 2006. This information is derived from our Financial Statements and the notes thereto. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8. Financial Statements and Supplementary Data.”

	YEAR ENDED DECEMBER 31,
	2006			2005			2004			2003			2002
	(In thousands, except per share amounts)
Statement of Operations Data:
Operating revenue:
Oil production	$	348,979		$	244,469		$	214,153		$	174,139		$	155,913
Gas production		337,321			391,771			330,048			334,166			221,582
Derivative income		2,688			—			—			—			—
Total operating revenue		688,988			636,240			544,201			508,305			377,495
Operating expenses:
Lease operating expenses		159,043			114,664			100,045			72,786			76,673
Production taxes		13,472			13,179			7,408			5,975			5,039
Depreciation, depletion and amortization		320,696			241,426			210,861			188,813			175,496
Write-down of oil and gas properties		510,013			—			—			—			—
Accretion expense		12,391			7,159			5,852			6,292			—
Derivative expense		—			3,388			4,099			8,711			15,968
Salaries, general and administrative expenses		34,266			22,705			14,311			14,870			13,190
Incentive compensation expense		4,356			1,252			2,318			2,636			851
Total operating expenses		1,054,237			403,773			344,894			300,083			287,217
Income (loss) from operations		(365,249	)		232,467			199,307			208,222			90,278
Other (income) expenses:
Interest expense		35,931			23,151			16,835			19,860			23,141
Other expense		5			—			1,541			538			—
Early extinguishment of debt		—			—			845			4,661			—
Merger expenses		50,029			—			—			—			—
Merger expense reimbursement		(51,500	)		—			—			—			—
Other income		(7,186	)		(3,894	)		(4,018	)		(3,133	)		(3,328	)
Total other expenses, net		27,279			19,257			15,203			21,926			19,813
Income (loss) before income taxes		(392,528	)		213,210			184,104			186,296			70,465
Income tax provision (benefit)		(138,306	)		76,446			64,436			65,203			24,662
Income (loss) before cumulative effects of accounting changes, net of tax		(254,222	)		136,764			119,668			121,093			45,803
Cumulative effects of accounting changes, net of tax (1)		—			—			—			2,099			—
Net income (loss)		($254,222	)	$	136,764		$	119,668		$	123,192		$	45,803
Earnings and dividends per common share:
Income (loss) before cumulative effects of accounting changes per share		($9.29	)	$	5.07		$	4.50		$	4.60		$	1.74
Earnings (loss) per common share		($9.29	)	$	5.07		$	4.50		$	4.67		$	1.74
Income (loss) before cumulative effects of accounting changes per share assuming dilution		($9.29	)	$	5.02		$	4.45		$	4.56		$	1.73
Earnings (loss) per common share assuming dilution		($9.29	)	$	5.02		$	4.45		$	4.64		$	1.73
Cash dividends declared		—			—			—			—			—
Cash Flow Data:
Net cash provided by operating activities	$	399,035		$	461,213		$	369,668		$	390,811		$	222,891
Net cash used in investing activities		(660,456	)		(499,932	)		(475,159	)		(341,180	)		(216,570	)
Net cash provided by (used in) financing activities		240,575			94,170			112,648			(60,140	)		8,133
Balance Sheet Data (at end of period):
Working capital (deficit)	$	1,845		$	16,506			($28,598	)		($38,474	)		($1,212	)
Oil and gas properties, net		1,784,425			1,810,959			1,517,308			1,216,141			963,494
Total assets		2,128,471			2,140,317			1,695,664			1,332,485			1,094,930
Long-term debt, less current portion		797,000			563,000			482,000			370,000			431,000
Stockholders’ equity		711,640			944,123			772,934			644,111			522,601

(1) Cumulative effects of accounting changes related to the adoption of SFAS No. 143 and change to the Units of Production method of DD&A.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     The following discussion is intended to assist in understanding our financial position and results of operations for each of the years in the three-year period ended December 31, 2006. Our financial statements and the notes thereto, which are found elsewhere in this Form 10-K contain detailed information that should be referred to in conjunction with the following discussion. See “Item 8. Financial Statements and Supplementary Data – Note 1.”

Executive Overview

     We are an independent oil and natural gas company engaged in the acquisition, exploration, exploitation, development and operation of oil and gas properties located in the conventional shelf of the Gulf of Mexico (the “GOM”), deep shelf of the GOM, deep water of the GOM and several basins in the Rocky Mountain Region. We are also engaged in an exploratory joint venture in Bohai Bay, China. Our business strategy is to increase reserves, production and cash flow through the acquisition, exploitation and development of mature properties in the Gulf Coast Basin and exploring opportunities in the deep water environment of the Gulf of Mexico, Rocky Mountain Region and other potential areas. See “Item 1. Business – Strategy and Operational Overview.”

     2006 Significant Events.

• Property Acquisition — On July 14, 2006, we completed a $188.1 million acquisition of additional working interests in Mississippi Canyon Blocks 109 and 108. The acquisition was financed with a portion of the proceeds from the private placement of $225 million aggregate principal amount of senior floating rate notes due 2010. With the acquisition, we increased our working interest in Mississippi Canyon Block 109 from 33% to 100% and in Mississippi Canyon Block 108 from 16.5% to 24.8%.

• International Operations - During 2006, we entered into an agreement to participate in the drilling of two exploratory wells on two offshore concessions in Bohai Bay, China. After the drilling of the two wells, it has been determined that additional drilling will be necessary to evaluate the commercial viability of this project. We have the potential to earn an interest in 750,000 acres on these two concessions.

• Termination of Merger Agreements – On April 23, 2006, we entered into an Agreement and Plan of Merger with Plains Exploration and Production Company (“PXP”) and Plains Acquisition Corporation, a wholly-owned subsidiary of PXP (“Plains Acquisition”). On June 22, 2006, we terminated our merger agreement with PXP and Plains Acquisition and entered into an Agreement and Plan of Merger (“EPL Merger Agreement”) with Energy Partners, Ltd. (“EPL”) and EPL Acquisition Corp. LLC (“EPL Acquisition”), a wholly-owned subsidiary of EPL. On October 11, 2006, we entered into an agreement with EPL and EPL Acquisition pursuant to which the EPL Merger Agreement was terminated.

     2007 Outlook.

     In December 2006, we announced that our Board of Directors had approved and endorsed a strategic plan to re-focus on our Gulf of Mexico conventional shelf properties. As part of this strategy, we expect to divest selected properties in the Rocky Mountain Region and the Gulf Coast Basin in 2007. We anticipate that the proceeds from the planned asset sales would be used to materially reduce our debt. We expect these divestitures to be substantially completed in the second quarter of 2007. As part of this renewed strategy, we anticipate further investment in our assets in Bohai Bay, China in 2007 to bring the project to evaluation. Additionally, we anticipate pursuing further opportunities in the deep water Gulf of Mexico on a selected basis.

     Our 2007 capital expenditures budget is approximately $320 million, excluding acquisitions, asset retirement costs, hurricane related expenditures and capitalized interest and general and administrative expenses. The $320 million is expected to be spent as follows:

GOM exploitation program	47	%
Rocky Mountain Region	27	%
GOM facilities and P&A projects	11	%
International exploration and purchase of deepwater seismic	15	%

     This budget will be revised if we complete the sale of selected properties in the Rocky Mountain Region and the Gulf Coast Basin in 2007.

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     Known Trends and Uncertainties

     Gulf Coast Basin Reserve Replacement – We have faced challenges in replacing production in the Gulf Coast Basin at a reasonable unit cost. This condition has been caused by a number of factors including the following:

• rising costs of drilling, abandonment and production services;

• lack of an adequate inventory of reserve targets of an attractive size; and

• inadequate risking of projects to assist in appropriate portfolio management.

     During 2005 and early 2006, we instituted organizational changes which we believe will lead to a replenishment of our prospect inventory. Additionally, we have employed a new risk management system for project evaluation that we believe will result in more efficient portfolio management. Our 2007 Gulf Coast conventional shelf exploitation program reflects the results of our organizational and risk management changes.

     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 would incur higher franchise tax expense in future years barring the implementation of other tax savings measures. See “Item 3. Legal Proceedings.”

     Hurricanes – Since the majority of our production originates in the Gulf of Mexico, we are particularly vulnerable to the effects of hurricanes on production. In 2006 and 2005, we experienced deferrals of production due to Hurricanes Katrina and Rita of approximately 15.6 Bcfe and 16.4 Bcfe, respectively. The most significant impact to Stone was at Mississippi Canyon 109/108, which resumed production in September 2006. Although we do include hurricane contingencies in our production forecasting models, hurricane activity can be more frequent and disruptive than what is projected as was the case in 2005.

     Regulatory Inquiries and Stockholder Lawsuits – We are subject to ongoing inquiries by the SEC and the Philadelphia Stock Exchange. We have also been named as a defendant in certain stockholder lawsuits resulting from our reserve restatement. The ultimate resolution of these matters and their impact on us is uncertain. See “Item 3. Legal Proceedings”.

     International Operations – Included in unevaluated oil and gas property costs at December 31, 2006 are $40.6 million of capital expenditures related to our properties in Bohai Bay, China. Under full cost accounting, investments in individual countries represent separate cost centers for computation of depreciation, depletion and amortization as well as for full cost ceiling test evaluations. Given that this is our sole investment in the Peoples Republic of China, it is possible that upon a more complete evaluation of this project that some or all of this investment would be reclassed as a charge to expense on our income statement.

     Potential Gain or Loss on Divestiture – We anticipate the completion of our Rocky Mountain and Gulf Coast Basins divestiture program in the second quarter of 2007. If the nature and extent of the divestiture is deemed to significantly alter the relationship between capitalized costs and proved reserves attributable to our United States full cost pool, then full cost accounting rules require us to recognize a gain or loss on the sale. We are unable to determine at this time whether the recognition of a gain or loss will be required.

     Asset Retirement Obligations – We are continuing to experience increases in costs related to the removal of facilities and tangible equipment at the end of an oil and gas property’s useful life. In addition, hurricane damage and destruction has accelerated the time frame in which some of these operations will occur. This has resulted in increases in accretion expense, which will continue in 2007 and perhaps beyond.

     Depreciation, Depletion and Amortization – At December 31, 2006, we recorded a ceiling test write-down which reduced our net investment in oil and gas properties in the amount of $510 million. This will result in a reduction of the going forward unit cost of depreciation, depletion and amortization in the amount of $0.86 per mcfe.

Liquidity and Capital Resources

     Cash Flow and Working Capital. Net cash flow provided by operating activities totaled $399.0 million during 2006 compared to $461.2 million and $369.7 million in 2005 and 2004, respectively. Based on our outlook of commodity prices and our estimated production, we expect to fund our 2007 capital expenditures with cash flow provided by operating activities.

     Net cash flow used in investing activities totaled $660.5 million, $499.9 million and $475.2 million during 2006, 2005 and 2004, respectively, which primarily represents our investment in oil and gas properties.

     Net cash flow provided by financing activities totaled $240.6 million, $94.2 million and $112.6 million for the years ended December 31, 2006, 2005 and 2004, respectively. Net cash flow provided by financing activities generated during 2006 primarily represents

24

proceeds from the issuance of our Senior Floating Rate Notes due 2010, borrowings net of repayments under our bank credit facility and proceeds from the exercise of stock options. Net cash flow provided by financing activities generated during 2005 primarily relates to borrowings net of repayments under our bank credit facility and proceeds from the exercise of stock options. Net cash flow provided by financing activities generated during 2004 primarily relates to the proceeds from our 6³/4% Senior Subordinated Notes offering offset in part by the use of offering proceeds to repay borrowings under our bank credit facility.

     We had working capital at December 31, 2006 of $1.8 million. We believe that our working capital balance should be viewed in conjunction with availability of borrowings under our bank credit facility when measuring liquidity. “Liquidity” is defined as the ability to obtain cash quickly either through the conversion of assets or incurrence of liabilities. See “Bank Credit Facility.”

     Our 2007 capital expenditures budget, excluding acquisitions, asset retirement costs, hurricane related expenditures and capitalized interest and general and administrative expenses, is approximately $320 million, or 13% less than our 2006 capital expenditures, excluding acquisitions, asset retirement costs and capitalized interest and general and administrative expenses. Based on our outlook of commodity prices and our estimated production, we expect to fund our 2007 capital program with cash flow provided by operating activities.

     To the extent that 2007 cash flow from operating activities exceeds our estimated 2007 capital expenditures, we may pay down a portion of our existing debt. If cash flow from operating activities during 2007 is not sufficient to fund estimated 2007 capital expenditures, we believe that our bank credit facility will provide us with adequate liquidity. See “Bank Credit Facility.”

     We do not budget acquisitions; however, we are continually evaluating opportunities that fit our specific acquisition profile. See “Item 1. Business – Strategy and Operational Overview.” Any one or a combination of certain of these possible transactions could fully utilize our existing sources of capital. Although we have no current plans to access the public markets for purposes of capital, if the opportunity arose, we would consider such funding sources to provide capital in excess of what is currently available to us.

     Bank Credit Facility. At February 14, 2007, we had $172 million of borrowings outstanding under our credit facility and letters of credit totaling $52.8 million had been issued pursuant to the facility. We have a borrowing base under the credit facility of $325 million, with availability of an additional $100.2 million in borrowings as of February 14, 2007. In July 2006, the borrowing base under the credit facility was increased to $325 million in connection with the preferential rights acquisition of the additional working interests in Mississippi Canyon Blocks 108 and 109. The borrowing base under the credit facility is re-determined periodically based on the bank group’s evaluation of our proved oil and gas reserves.

     Under the financial covenants of our credit facility, we must (i) maintain a ratio of consolidated debt to consolidated EBITDA, as defined in the amended credit agreement, for the preceding four quarterly periods of not greater than 3.25 to 1 and (ii) maintain a Consolidated Tangible Net Worth (as defined). As of December 31, 2006 our debt to EBITDA Ratio was 1.64 to 1 and our Consolidated Tangible Net Worth was approximately $233.6 million in excess of the amount required to be maintained. In addition, the credit facility places certain customary restrictions or requirements with respect to disposition of properties, incurrence of additional debt, change of ownership and reporting responsibilities. These covenants may limit or prohibit us from paying cash dividends.

     Hedging. See “Item 7A. Quantitative and Qualitative Disclosure About Market Risk – Commodity Price Risk.”

Contractual Obligations and Other Commitments

     The following table summarizes our significant contractual obligations and commitments, other than hedging contracts, by maturity as of December 31, 2006.

			Less than						More than
	Total		1 Year		1-3 Years		4-5 Years		5 Years
					(In thousands)
Contractual Obligations and Commitments:
81/4% Senior Subordinated Notes due 2011	$	200,000	$	—	$	—	$	200,000	$	—
63/4% Senior Subordinated Notes due 2014		200,000		—		—		—		200,000
Senior floating rate notes due 2010		225,000		—		—		225,000		—
Bank credit facility (1)		172,000		—		172,000		—		—
Interest (2)		278,639		61,883		106,252		70,559		39,945
Asset retirement obligations including accretion		595,469		132,045		27,995		93,334		342,095
Rig commitments		64,586		38,859		20,215		5,512		—
Seismic data commitments (3)		30,269		21,669		8,600		—		—
Operating lease obligations		1,604		586		747		271		—
Total Contractual Obligations and Commitments	$	1,767,567	$	255,042	$	335,809	$	594,676	$	582,040

(1)	The bank credit facility matures on April 30, 2008. See "Bank Credit Facility” above.
(2)	Assumes 7% interest rate on the credit facility and 8.2% on the senior floating rate notes through July 15, 2007, 9.2% thereafter.
(3)	Represents pre-commitments for seismic data purchases.

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Results of Operation

     2006 Compared to 2005. The following table sets forth certain operating information with respect to our oil and gas operations and summary information with respect to our estimated proved oil and gas reserves. See “Item 2. Properties – Oil and Natural Gas Reserves.”

	Year Ended December 31,
	2006		2005		Variance			% Change
Production:
Oil (MBbls)		5,593		4,838		755			16	%
Natural gas (MMcf)		43,508		54,129		(10,621	)		(20	%)
Oil and natural gas (MMcfe)		77,066		83,158		(6,092	)		(7	%)
Average prices: (1)
Oil (per Bbl)	$	62.40	$	50.53	$	11.87			24	%
Natural gas (per Mcf)		7.75		7.24		0.51			7	%
Oil and natural gas (per Mcfe)		8.91		7.65		1.26			17	%
Expenses (per Mcfe):
Lease operating expenses	$	2.06	$	1.38	$	0.68			49	%
Salaries, general and administrative expenses (2)		0.44		0.27		0.17			63	%
DD&A expense on oil and gas properties		4.11		2.87		1.24			43	%
Estimated Proved Reserves at December 31:
Oil (MBbls)		41,360		41,509		(149	)		(0.4	%)
Natural gas (MMcf)		342,782		344,088		(1,306	)		(0.4	%)
Oil and natural gas (MMcfe)		590,942		593,142		(2,200	)		(0.4	%)

(1)	Includes the settlement of effective hedging contracts.
(2)	Exclusive of incentive compensation expense.

     For the year ended 2006, we reported a net loss totaling $254.2 million, or $9.29 per share, compared to net income for the year ended December 31, 2005 of $136.8 million, or $5.02 per share. All per share amounts are on a diluted basis.

     We follow the full cost method of accounting for oil and gas properties. At the end of 2006, we recognized a ceiling test write-down of our oil and gas properties totaling $510.0 million, or $330.5 million after taxes. This expense did not impact our cash flow from operations but did reduce net income and stockholders’ equity.

     Included in the year-to-date 2006 net loss is $51.5 million in merger expense reimbursements partially offset by $50.0 million in merger related expenses. Merger expenses include a $43.5 million termination fee incurred in connection with the proposed merger with EPL. Prior to entering into the EPL Merger Agreement, we terminated our merger agreement with Plains Exploration and Production Company (“Plains”) and Plains Acquisition Corp. (“Plains Acquisition”) on June 22, 2006. As required under the terms of the terminated merger agreement among Stone, Plains and Plains Acquisition, Plains was entitled to a termination fee of $43.5 million (“Plains Termination Fee”), which was advanced by EPL to Plains on June 22, 2006. Pursuant to the EPL Merger Agreement, we were obligated to repay all or a portion of this termination fee under certain circumstances if the EPL merger was not consummated. The $43.5 million termination fee was recorded as merger expenses in the income statement during the second quarter of 2006. Of this amount, $25.3 million was potentially reimbursable to EPL under certain circumstances described in the EPL Merger Agreement and therefore was recorded as deferred revenue on the balance sheet as of June 30, 2006 and September 30, 2006. The remaining $18.2 million of the termination fee was recorded as merger expense reimbursement in the income statement during the three months ended June 30, 2006.

     On October 11, 2006, we entered into an agreement with EPL and EPL Acquisition pursuant to which the EPL Merger Agreement was terminated. Pursuant to the termination of the EPL Merger Agreement, EPL paid us $8 million and released all claims to the $43.5 million Plains Termination Fee. The $8.0 million fee paid to us by EPL in conjunction with the termination of the EPL Merger Agreement was recorded as merger expense reimbursement in the income statement in the fourth quarter of 2006. Additionally, the remaining $25.3 million of the Plains Termination Fee was recognized as merger expense reimbursement in earnings in the fourth quarter of 2006.

     The variance in annual results was also due to the following components:

     Production. 2006 production totaled 5,593,000 barrels of oil and 43.5 Bcf of natural gas compared to 4,838,000 barrels of oil and 54.1 Bcf of natural gas produced during 2005, a decrease on a gas equivalent basis of 6.1 Bcfe. 2006 total production rates were

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negatively impacted by extended Gulf Coast shut-ins due to Hurricanes Katrina and Rita, amounting to volumes of approximately 15.6 Bcfe, or 43MMcfe per day, while 2005 production rates reflected shut-ins due to Hurricanes Katrina and Rita, amounting to volumes of approximately 16.4 Bcfe, or 45 MMcfe per day. Without the effects of the hurricane production deferrals, year to year total production volumes decreased approximately 6.9 Bcfe, as a result of natural production declines.

     Approximately 85% of our 2006 production volumes were generated from our Gulf Coast Basin properties while the remaining 15% came from our Rocky Mountain Region properties.

     Prices. Prices realized during 2006 averaged $62.40 per barrel of oil and $7.75 per Mcf of natural gas compared to 2005 average realized prices of $50.53 per barrel of oil and $7.24 per Mcf of natural gas. On a gas equivalent basis, average 2006 prices were 17% higher than prices realized during 2005. All unit pricing amounts include the 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. During the year ended December 31, 2006, we realized a net increase in natural gas revenue related to our effective zero-premium collars of $37.0 million, or $0.85 per Mcf and a net increase in oil revenue of $0.1 million, or $0.02 per barrel. We realized a net decrease of $31.2 million ($0.58 per Mcf) in natural gas revenue related to our effective swaps and a net decrease of $10.9 million ($2.26 per Bbl) in oil revenue related to our effective zero-premium collars for the year ended December 31, 2005.

     Oil and Natural Gas Revenue. As a result of 17% higher realized prices on a gas equivalent basis, oil and natural gas revenue increased 8% to $686.3 million in 2006 from $636.2 million during 2005 despite a 7% decline in total production volumes during 2006.

     Derivative Income/Expense. During 2006, certain of our derivative contracts were determined to be partially ineffective because of differences in the relationship between the fixed price in the derivative contract and actual prices realized. Derivative income for the year ended December 31, 2006 totaled $2.7 million, consisting of $2.3 million of cash settlements on the ineffective portion of derivatives and $0.4 million of changes in the fair market value of the ineffective portion of derivatives.

     As a result of extended shut-ins of production after Hurricane Katrina and Hurricane Rita, our September, October and November 2005 crude oil production levels were below the volumes that were hedged. Consequently, one of our crude oil hedges for the months of September, October and November 2005 was deemed to be ineffective. During 2005, we recognized $3.4 million of derivative expenses, which related to the cash settlement of the ineffective crude oil collars.

     Expenses. During 2006, we incurred lease operating expenses of $159.0 million, compared to $114.7 million incurred during 2005. On a unit of production basis, 2006 lease operating expenses were $2.06 per Mcfe as compared to $1.38 per Mcfe for 2005. 2006 lease operating costs included an approximate $19 million increase in property and control-of-well insurance premiums and $24 million of repairs in excess of estimated insurance recoveries related to damage from Hurricanes Katrina, Rita and Ivan and increased major maintenance repair activity.

     Depreciation, depletion and amortization (“DD&A”) expense on oil and gas properties for 2006 totaled $316.8 million, or $4.11 per Mcfe, compared to DD&A expense of $238.3 million, or $2.87 per Mcfe in 2005. The increase in 2006 DD&A on a unit basis is attributable to the unit cost of current year net reserve additions (including future development costs) exceeding the per unit amortizable base as of the beginning of the year. See Known Trends and Uncertainties.

     During 2006 and 2005, salaries, general and administrative (“SG&A”) expenses totaled $34.3 million and $22.7 million, respectively. The increase in SG&A is primarily due to approximately $3.7 million of additional compensation expense associated with restricted stock issuances and stock option expensing, an approximate $2.5 million increase in legal and consulting fees and a $2.6 million increase in salaries and wages expense resulting from salary adjustments.

     Incentive compensation expense for 2006 totaled $4.4 million compared to $1.3 million for 2005. The increase in incentive compensation expense is due to an employee retention program put in place by the board of directors in the third quarter of 2006 whereby employees earned bonuses equal to 100% of their targeted bonus opportunity in 2006.

     During 2006 and 2005, we incurred $12.4 million and $7.2 million, respectively, of accretion expense related to asset retirement obligations. The increase in 2006 accretion expense is due to higher estimated asset retirement costs. We had approximately $10.3 million of additional asset retirement costs related to asset additions in 2006, $6.5 million of which relates to the acquisition of additional working interests in Mississippi Canyon Blocks 109 and 108 (See Note 5).

     The approximate $169.3 million revision in estimates of asset retirement obligations in 2006 is due to the following factors: (1) approximately $142.0 million of the increase is due to a significant increase in 2006 in the cost of services necessary to abandon oil and gas properties and (2) approximately $27.3 million of the increase is due to changes in the timing to plug and abandon our facilities.

     For the years ended December 31, 2006 and 2005, production taxes totaled $13.5 million and $13.2 million, respectively. Despite a decrease in gas production volumes for the year, 2006 production taxes increased slightly due to a prior year ad valorem tax adjustment on certain of our Rocky Mountain properties expensed in the first quarter of 2006.

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     Interest expense for 2006 totaled $35.9 million, net of $18.2 million of capitalized interest, compared to interest of $23.2 million, net of $14.9 million of capitalized interest, during 2005. The increase in interest expense in 2006 is primarily the result of increased interest rates and the issuance of our senior floating rate notes.

     Reserves. At December 31, 2006, our estimated proved oil and gas reserves totaled 590.9 Bcfe, compared to December 31, 2005 reserves of 593.1 Bcfe. The decrease in estimated proved reserves during 2006 was the result of production and downward revisions of previous estimates exceeding additions from drilling results and acquisitions made during the year. Estimated proved natural gas reserves totaled 342.8 Bcf and estimated proved oil reserves totaled 41.4MMBbls at the end of 2006. The reserve estimates at December 31, 2006 were prepared by engineering firms in accordance with guidelines established by the SEC.

     Our standardized measure of discounted future net cash flows was $1.2 billion and $1.9 billion at December 31, 2006 and 2005, respectively. You should not assume that these estimates of future net cash flows represent the fair value of our estimated oil and natural gas reserves. As required by the SEC, we determine these estimates of future net cash flows using market prices for oil and gas on the last day of the fiscal period. The average year-end oil and gas prices net of differentials on all of our properties used in determining these amounts, excluding the effects of hedges in place at year-end, were $56.90 per barrel and $5.39 per Mcf for 2006 and $57.17 per barrel and $9.86 per Mcf for 2005.

     2005 Compared to 2004. The following table sets forth certain operating information with respect to our oil and gas operations and summary information with respect to our estimated proved oil and gas reserves. See “Item 2. Properties – Oil and Natural Gas Reserves.”

	Year Ended December 31,
	2005		2004		Variance			% Change
Production:
Oil (MBbls)		4,838		5,438		(600	)		(11	%)
Natural gas (MMcf)		54,129		55,544		(1,415	)		(3	%)
Oil and natural gas (MMcfe)		83,158		88,172		(5,014	)		(6	%)
Average prices: (1)
Oil (per Bbl)	$	50.53	$	39.38	$	11.15			28	%
Natural gas (per Mcf)		7.24		5.94		1.30			22	%
Oil and natural gas (per Mcfe)		7.65		6.17		1.48			24	%
Expenses (per Mcfe):
Lease operating expenses	$	1.38	$	1.13	$	0.25			22	%
Salaries, general and administrative expenses (2)		0.27		0.16		0.11			69	%
DD&A expense on oil and gas properties		2.87		2.36		0.51			21	%
Estimated Proved Reserves at December 31:
Oil (MBbls)		41,509		42,385		(876	)		(2	%)
Natural gas (MMcf)		344,088		413,902		(69,814	)		(17	%)
Oil and natural gas (MMcfe)		593,142		668,210		(75,068	)		(11	%)

(1)	Includes the settlement of effective hedging contracts.
(2)	Exclusive of incentive compensation expense.

     For the year ended December 31, 2005, we reported net income totaling $136.8 million, or $5.02 per share, compared to net income for the year ended December 31, 2004 of $119.7 million, or $4.45 per share. The variance in annual results was due to the following components:

     Production. During 2005, total production volumes decreased 6% to 83.2 Bcfe compared to 88.2 Bcfe produced during 2004. Oil production during 2005 totaled approximately 4.8 million barrels compared to 2004 oil production of 5.4 million barrels, while natural gas production during 2005 totaled approximately 54.1 billion cubic feet compared to 55.5 billion cubic feet produced during 2004. The decrease in overall 2005 production was primarily the result of extended production downtime from Hurricanes Katrina and Rita (16.4 Bcfe) in excess of downtime experienced for Hurricane Ivan in 2004 (7.0 Bcfe).

     Prices. Prices realized during 2005 averaged $50.53 per barrel of oil and $7.24 per Mcf of natural gas compared to 2004 average realized prices of $39.38 per barrel of oil and $5.94 per Mcf of natural gas. On a gas equivalent basis, average 2005 prices were 24% higher than prices realized during 2004. All unit pricing amounts include the 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. During 2005, hedging transactions decreased the average price we received for natural gas by $0.58 per Mcf and for oil by $2.26 per Bbl compared to a net decrease of $0.18 per Mcf of natural gas realized during 2004.

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     Oil and Gas Revenue. As a result of 24% higher realized prices on a gas equivalent basis, oil and natural gas revenue increased 17% to $636.2 million in 2005 from $544.2 million during 2004 despite a 6% decline in total production volumes during 2005.

     Expenses. During 2005, we incurred lease operating expenses of $114.7 million, compared to $100.0 million incurred during 2004. On a unit of production basis, 2005 lease operating expenses were $1.38 per Mcfe as compared to $1.13 per Mcfe for 2004. The increase in lease operating expenses in 2005 is due to a combination of increases in overall industry service costs and additional costs associated with storm-related shut-ins and evacuations. Included in lease operating expenses are maintenance costs, which represent repairs and maintenance costs that vary from year to year. Maintenance costs totaled $28.9 million in 2005 compared to $29.1 million in 2004.

     DD&A expense on oil and gas properties for 2005 totaled $238.3 million, or $2.87 per Mcfe compared to DD&A expense of $208.0 million, or $2.36 per Mcfe in 2004. The increase in 2005 DD&A on a unit basis is attributable to the unit cost of current year net reserve additions (including future development costs) exceeding the per unit amortizable base as of the beginning of the year. See Known Trends and Uncertainties.

     During 2005 and 2004, we incurred $7.2 million and $5.9 million, respectively, of accretion expense related to the January 1, 2003 adoption of SFAS No. 143, “Accounting for Asset Retirement Obligations.”

     The approximate $50 million revision in estimates of asset retirement obligations in 2005 is due to the following factors: (1) approximately $20.5 million of the increase is due to a significant increase in 2005 in the cost of services necessary to abandon oil and gas properties; (2) approximately $9.7 million of the increase is due to an accelerated time frame in which certain of our oil and gas properties will need to be abandoned as a result of hurricanes Katrina and Rita; and (3) approximately $19.8 million of the increase is due to additional costs of wreckage and debris removal associated with the hurricanes.

     Interest expense for 2005 totaled $23.2 million, net of $14.9 million of capitalized interest, compared to interest of $16.8 million, net of $7.0 million of capitalized interest, during 2004. The increase in interest expense in 2005 is primarily the result of the issuance of our $200 million 6³/4% Senior Subordinated Notes on December 15, 2004.

     Reserves. At December 31, 2005, our estimated proved oil and natural gas reserves totaled 593.1 Bcfe, compared to December 31, 2004 reserves of 668.2 Bcfe. The decrease in estimated proved reserves during 2005 was the result of production and downward revisions of previous estimates exceeding additions from drilling results and acquisitions made during the year. Estimated proved natural gas reserves totaled 344.1 Bcf and estimated proved oil reserves totaled 41.5 MMBbls at the end of 2005. The reserve estimates at December 31, 2005 were engineered and/or audited by engineering firms in accordance with guidelines established by the SEC.

     Our standardized measure of discounted future net cash flows was $1.9 billion and $1.6 billion at December 31, 2005 and 2004, respectively. You should not assume that these estimates of future net cash flows represent the fair value of our estimated oil and natural gas reserves. As required by the SEC, we determine these estimates of future net cash flows using market prices for oil and gas on the last day of the fiscal period. The average year-end oil and gas prices on all of our properties used in determining these amounts, excluding the effects of hedges in place at year-end, were $57.17 per barrel and $9.86 per Mcf for 2005 and $41.06 per barrel and $6.57 per Mcf for 2004.

Off-Balance Sheet Arrangements

     We have no off-balance sheet arrangements.

Forward-Looking Statements

     Certain of the statements set forth under this item and elsewhere in this Form 10-K are forward-looking and are based upon assumptions and anticipated results that are subject to numerous risks and uncertainties. See “Item 1. Business — Forward-Looking Statements” and “Item 1A. Risk Factors.”

Accounting Matters and Critical Accounting Policies

     Asset Retirement Obligations. Our accounting for asset retirement obligations is governed by SFAS No. 143, “Accounting for Asset Retirement Obligations”. This statement requires us to record our estimate of the fair value of liabilities related to future asset retirement obligations in the period the obligation is incurred. Asset retirement obligations relate to the removal of facilities and tangible equipment at the end of an oil and gas property’s useful life. The adoption of SFAS No. 143 requires the use of management’s estimates with respect to future abandonment costs, inflation, market risk premiums, useful life and cost of capital. As required by SFAS No. 143, our estimate of our asset retirement obligations does not give consideration to the value the related assets could have to other parties.

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     Full Cost Method. We use the full cost method of accounting for our oil and gas properties. Under this method, all acquisition, exploration, development and estimated abandonment costs, including certain related employee costs and general and administrative costs (less any reimbursements for such costs), incurred for the purpose of acquiring and finding oil and gas are capitalized. Unevaluated property costs are excluded from the amortization base until we have made a determination as to the existence of proved reserves on the respective property or impairment. We review our unevaluated properties at the end of each quarter to determine whether the costs should be reclassified to the full cost pool and thereby subject to amortization. Sales of oil and gas properties are accounted for as adjustments to the net full cost pool with no gain or loss recognized, unless the adjustment would significantly alter the relationship between capitalized costs and proved reserves.

     We amortize our investment in oil and gas properties through DD&A using the units of production (“UOP”) method. Under the UOP method, the quarterly provision for DD&A is computed by dividing production volumes for the period by the total proved reserves as of the beginning of the period, and applying the respective rate to the net cost of proved oil and gas properties, including future development costs.

     We capitalize a portion of the interest costs incurred on our debt that is calculated based upon the balance of our unevaluated property costs and our weighted-average borrowing rate. We also capitalize the portion of salaries, general and administrative expenses that are attributable to our acquisition, exploration and development activities.

     Generally accepted accounting principles allow the option of two acceptable methods for accounting for oil and gas properties. The successful efforts method is the allowable alternative to the full cost method. The primary differences between the two methods are in the treatment of exploration costs and in the computation of DD&A. Under the full cost method, all exploratory costs are capitalized while under the successful efforts method exploratory costs associated with unsuccessful exploratory wells and all geological and geophysical costs are expensed. Under full cost accounting, DD&A is computed on cost centers represented by entire countries while under successful efforts cost centers are represented by properties, or some reasonable aggregation of properties with common geological structural features or stratigraphic condition, such as fields or reservoirs.

     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.

     Stock-Based Compensation. On December 16, 2004, the FASB issued SFAS No. 123(R), “Share-Based Payments”, which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 123(R) supersedes Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees”, and amends SFAS No. 95, “Statement of Cash Flows.” SFAS No. 123(R) became effective for us on January 1, 2006.

     We have elected to adopt the requirements of SFAS No. 123(R) using the “modified prospective” method. Under this method, compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS No. 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of SFAS No. 123 for all awards granted prior to the effective date of SFAS No. 123(R) that remain unvested on the effective date. The net effect of the implementation of SFAS No. 123(R) on net income for the year ended December 31, 2006 was immaterial.

     Derivative Instruments and Hedging Activities. Under SFAS No. 133, as amended, the nature of a derivative instrument must be evaluated to determine if it qualifies for hedge accounting treatment. We do not use derivative instruments for trading purposes. Instruments qualifying for hedge accounting treatment are recorded as an asset or liability measured at fair value and subsequent changes in fair value are recognized in equity through other comprehensive income, net of related taxes, to the extent the hedge is effective. Instruments not qualifying for hedge accounting treatment are recorded in the balance sheet and changes in fair value are recognized in earnings. During 2006, certain of our hedges became ineffective because of differences in the relationship between the fixed price in the derivative contract and actual prices realized. This resulted in income in the amount of $2.7 million. During 2005, certain of our hedges became ineffective when actual production was less than hedged volumes, resulting in a charge to income in the amount of $3.4 million.

     Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. 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;

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• 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; and

• contingencies.

     For a more complete discussion of our accounting policies and procedures see our Notes to Consolidated Financial Statements beginning on page F-8.

Recent Accounting Developments

     Accounting for Income Taxes. On July 13, 2006, the FASB issued its Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. It also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 will be effective for fiscal years beginning after December 15, 2006.

     Fair Value Accounting. On September 15, 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. SFAS No.157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosure about fair value measurements. SFAS No.157 will be effective for financial statements issued for fiscal years beginning after November 15, 2007.

     Pension Accounting. On September 29, 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Post-retirement Plans”. SFAS No. 158 requires an employer to recognize the over-funded or under-funded status of a defined benefit post-retirement plan as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of the entity. SFAS No. 158 is effective for us as of the end of the fiscal year ending after December 31, 2006.

     Financial Statement Misstatements. The SEC issued Staff Accounting Bulletin (“SAB”) No. 108, “Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements”, on September 13, 2006. SAB No. 108 expresses the staff’s views regarding the process of quantifying financial statement misstatements in determining materiality. The guidance in this SAB is effective for fiscal years ending after November 15, 2006.

     We do not anticipate that the implementation of these new standards will have a material effect on our financial statements.

     The Fair Value Option for Certain Items. In February of 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Liabilities – Including an amendment of FASB Statement No. 115”. SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. This statement will be effective for us January 1, 2008. We have not yet determined the impact, if any, that adopting this standard may have on our financial statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Operating Cost Risk

     We are currently experiencing rising operating costs which also impacts our cash flow from operating activities and profitability. Assuming the costs to operate our properties, including lease operating expenses and maintenance cost, increased 10%, we estimate our diluted net loss per share for 2006 would have increased approximately $0.42 per share.

     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. Assuming a 10% decline in realized oil and natural gas prices, including the effects of hedging contracts, we estimate our diluted net loss per share for 2006 would have increased approximately $1.66 per share. 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. Oil contracts typically settle using the average of the daily closing prices for a calendar month. Natural gas contracts typically settle using the average closing prices for near month NYMEX futures contracts for the three days prior to the settlement date.

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     We have entered into zero-premium collars with various counterparties for a portion of our expected 2007 and 2008 oil and natural gas production from the Gulf Coast Basin. The natural gas collar settlements are based on an average of NYMEX prices for the last three days of a respective month. The oil collar settlements are based upon an average of the NYMEX closing price for West Texas Intermediate (“WTI”) during the entire calendar month. The 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.

     The following tables show our hedging positions as of February 14, 2007:

	Zero-Premium Collars
	Natural Gas							Oil
	Daily							Daily
	Volume			Floor		Ceiling		Volume		Floor		Ceiling
	(MMBtus/d)			Price		Price		(Bbls/d)		Price		Price
2007		20,000		$	7.50	$	10.40		3,000	$	60.00	$	78.35
2007		60,000	*		7.00		9.40		3,000		60.00		93.05
2008		—			—		—		3,000		60.00		90.20

* March — December

     We believe these positions have hedged approximately 50% of our estimated 2007 production and approximately 5% — 10% of our estimated 2008 production.

     Interest Rate Risk

     We had long-term debt outstanding of $797 million at December 31, 2006, of which $400 million, or approximately 50%, 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 December 31, 2006, the remaining $397 million of our outstanding long-term debt bears interest at a floating rate and consists of $172 million of borrowings outstanding under our bank credit facility and $225 million aggregate principal amount of senior floating rate notes. At December 31, 2006, the weighted average interest rate under our bank credit facility was approximately 6.9% per annum. At December 31, 2006, the interest rate under our senior floating rate notes was equal to three-month LIBOR (as defined in the indenture governing the notes) plus an applicable margin of 2.75%. The applicable margin will increase by 1% on July 15, 2007. We currently have no interest rate hedge positions in place to reduce our exposure to changes in interest rates. Assuming a 200 basis point increase in market interest rates during 2006 our interest expense, net of capitalization, would have increased approximately $2.6 million, net of taxes, resulting in a $0.10 per diluted share increase in our reported net loss.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     Information concerning this Item begins on Page F-1.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

     There have been no disagreements with our independent registered public accounting firm on our accounting or financial reporting that would require our independent registered public accounting firm to qualify or disclaim their report on our financial statements, or otherwise require disclosure in this Annual Report on Form 10-K.

ITEM 9A. CONTROLS AND PROCEDURES

     Evaluation of Disclosure Controls and Procedures

     As of December 31, 2006, we carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer (CEO) and our Chief Financial Officer (CFO), as to the effectiveness, design, and operation of our disclosure controls and procedures, as defined by the Securities Exchange Act of 1934, as amended. As discussed below, we have made

32

various changes in our internal controls which we believe remediate the material weakness previously identified by the company. We are relying on those changes in internal controls as an integral part of our disclosure controls and procedures. Our evaluation considered the various processes carried out under the direction of our disclosure committee in an effort to ensure that information required to be disclosed in the SEC reports we file or submit under the Exchange Act is accurate, complete, and timely.

     Based on the results of this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of December 31, 2006.

     See Part II, Item 8 Financial Statements and Supplementary Data under Management’s Annual Report on Internal Control over Financial Reporting.

     Changes in Internal Control Over Financial Reporting

     As previously disclosed, in October 2005 we completed an internal review of our estimates of proved oil and natural gas reserves. As a result of this review and subsequent reviews, we reduced our estimate of total proved oil and natural gas reserves at December 31, 2004 by approximately 237 Bcfe. Consequently, we revised our historical proved reserves for the period from December 31, 2001 to June 30, 2005. This revision of reserves also resulted in a restatement of financial information for the years from 2001 through 2004 and for the first six months of 2005.

     Furthermore, we identified deficiencies in our internal controls that did not prevent the overstatement of our proved oil and natural gas reserves. These deficiencies, which we believe constituted a material weakness in our internal control over financial reporting, included an overly aggressive and optimistic tone by some former members of management which created a weak control environment surrounding the booking of proved oil and natural gas reserves, and inadequate training and understanding of the SEC rules for booking oil and natural gas reserves. In light of the determination that previously issued financial statements should be restated, our management concluded that a material weakness in internal control over financial reporting existed as of December 31, 2005 and disclosed this matter to the Audit Committee and our independent registered public accounting firm. For additional information relating to the control deficiencies that resulted in the material weakness described above, please see the discussion under Item 9A. Controls and Procedures contained in our 2005 Form 10-K/A and Item 4. Controls and Procedures contained in our Quarterly Reports on Form 10-Q for March 31, 2006, June 30, 2006 and September 30, 2006.

     During the fourth quarter of 2005, and continuing throughout 2006 we have implemented the following actions which we believe remediate the weaknesses identified:

• The members of management that contributed to the aggressive and optimistic tone of management in booking estimated proved reserves were no longer employed or affiliated with Stone as employees, officers, or directors as of December 31, 2005.

• For the first three quarters of 2006 the reserve estimation process was under the supervision and guidance of the Vice President — Reserves. Subsequent to the resignation of the Vice President — Reserves, management with the approval of the Reserve Committee has appointed an Interim Reserve Manager to continue stewarding our proved reserve estimation efforts.

• Beginning in the fourth quarter of 2005, and continuing throughout 2006 formal training programs have been conducted at periodic intervals involving all those included in the proved reserve estimation process.

• As of December 31, 2006, all of our proved reserves have been fully engineered by nationally recognized outside engineering firms.

• At periodic intervals, the Reserve Committee and the Audit Committee of the Stone Energy Board of Directors have been actively engaged in monitoring the status of our remediation efforts of the material weakness in the proved reserve estimation process.

33

     Management’s Report on Internal Control over Financial Reporting

     Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined by the Securities Exchange Act of 1934, as amended. Under the supervision and with the participation of our management, including the CEO and CFO, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2006. In making this assessment, we used the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our evaluation, we have concluded that our internal controls over financial reporting were effective as of December 31, 2006. Our assessment of the effectiveness of our internal control over financial reporting as of December 31, 2006 has been audited by Ernst and Young LLP, an independent public accounting firm, as stated in their report which is included herein.

     ITEM 9B. OTHER INFORMATION

None.

34

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Stockholders and Board of Directors
Stone Energy Corporation

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting, that Stone Energy Corporation (the Company) maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Stone Energy Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that Stone Energy Corporation maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the COSO control criteria. Also, in our opinion, Stone Energy Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on the COSO control criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Stone Energy Corporation as of December 31, 2006 and 2005, and the related consolidated statements of operations, cash flows, changes in stockholders’ equity and comprehensive income for each of the three years in the period ended December 31, 2006 of Stone Energy Corporation and our report dated February 23, 2007 expressed an unqualified opinion thereon.

/s/Ernst & Young LLP

New Orleans, Louisiana
February 23, 2007

35

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

     See Item 4A. Executive Officers of the Registrant for information regarding our executive officers.

     Additional information required by Item 10, including information regarding our audit committee financial experts, is incorporated herein by reference to such information as set forth in our definitive Proxy Statement for our 2007 Annual Meeting of Stockholders to be held on May 17, 2007. The Company has made available free of charge on its Internet Web Site (www.StoneEnergy.com) the Code of Business Conduct and Ethics applicable to all employees of the Company including the Chief Executive Officer, Chief Financial Officer and Principal Accounting Officer.

ITEM 11. EXECUTIVE COMPENSATION

     The information required by Item 11 is incorporated herein by reference to such information as set forth in our definitive Proxy Statement for our 2007 Annual Meeting of Stockholders to be held on May 17, 2007.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

     The information required by Item 12 is incorporated herein by reference to such information as set forth in our definitive Proxy Statement for our 2007 Annual Meeting of Stockholders to be held on May 17, 2007.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

     The information required by Item 13 is incorporated herein by reference to such information as set forth in our definitive Proxy Statement for our 2007 Annual Meeting of Stockholders to be held on May 17, 2007.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

     The information required by Item 14 is incorporated herein by reference to such information as set forth in our definitive Proxy Statement for our 2007 Annual Meeting of Stockholders to be held on May 17, 2007.

36

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) 1. Financial Statements:

The following consolidated financial statements, notes to the consolidated financial statements and the Report of Independent Registered Public Accounting Firm thereon are included beginning on page F-1 of this Form 10-K:

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheet as of December 31, 2006 and 2005

Consolidated Statement of Operations for the three years in the period ended December 31, 2006

Consolidated Statement of Cash Flows for the three years in the period ended December 31, 2006

Consolidated Statement of Changes in Stockholders’ Equity for the three years in the period ended December 31, 2006

Consolidated Statement of Comprehensive Income for the three years in the period ended December 31, 2006

Notes to the Consolidated Financial Statements

2. Financial Statement Schedules:

All schedules are omitted because the required information is inapplicable or the information is presented in the Financial Statements or the notes thereto.

3. 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	—	Restated Bylaws of the Registrant.
4.1	—	Rights Agreement, with exhibits A, B and C thereto, dated as of October 15, 1998, between Stone Energy Corporation and ChaseMellon Shareholder Services, L.L.C., as Rights Agent (incorporated by reference to Exhibit 4.1 to the Registrant’s Registration Statement on Form 8-A (File No. 001-12074)).
4.2	—	Amendment No. 1, dated as of October 28, 2000, to Rights Agreement dated as of October 15, 1998, between Stone Energy Corporation and ChaseMellon Shareholder Services, L.L.C., as Rights Agent (incorporated by reference to Exhibit 4.4 to the Registrant’s Registration Statement on Form S-4 (Registration No. 333-51968)).
4.3	—	Indenture between Stone Energy Corporation and JPMorgan Chase Bank dated December 10, 2001 (incorporated by reference to Exhibit 4.4 to the Registrant’s Registration Statement on Form S-4 (Registration No. 333-81380)).
4.4	—	Indenture between Stone Energy Corporation and JPMorgan Chase Bank, National Association, as trustee, dated December 15, 2004 (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed on December 15, 2004.)
4.5	—	Indenture between Stone Energy Corporation and JPMorgan Chase Bank, National Association, as trustee, dated June 28, 2006 (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed on June 28, 2006.)

37

4.6	—	Registration Rights Agreement between Stone Energy Corporation and the Initial Purchasers of the Floating Rate Senior Notes due 2010 named therein, dated as of June 28, 2006 (incorporated by reference to Exhibit 4.2 to the registrant’s Current Report on Form 8-K dated June 28, 2006 (File No. 001-12074)).
†10.1	—	Deferred Compensation and Disability Agreements between TSPC and D. Peter Canty dated July 16, 1981, and between TSPC and James H. Prince dated August 23, 1981 and September 20, 1981, respectively (incorporated by reference to Exhibit 10.8 to the Registrant’s Registration Statement on Form S-1 (Registration No. 33-62362)).
†10.2	—	Conveyances of Net Profits Interests in certain properties to D. Peter Canty and James H. Prince (incorporated by reference to Exhibit 10.9 to the Registrant’s Registration Statement on Form S-1 (Registration No. 33-62362)).
†10.3	—	Deferred Compensation and Disability Agreement between TSPC and E. J. Louviere dated July 16, 1981 (incorporated by reference to Exhibit 10.10 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1995 (File No. 001-12074)).
†10.4	—	Stone Energy Corporation Annual Incentive Compensation Plan (incorporated by reference to Exhibit 10.14 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1993 (File No. 001-12074)).
†10.5	—	Stone Energy Corporation Amendment to the Annual Incentive Compensation Plan dated January 15, 1997 (incorporated by reference to Exhibit 10.9 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2000 (File No. 001-12074)).
†10.6	—	Stone Energy Corporation Revised Annual Incentive Compensation Plan (incorporated by reference to Exhibit 10.10 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2002 (File No. 001-12074)).
†10.7	—	Stone Energy Corporation 2001 Amended and Restated Stock Option Plan (incorporated by reference to Exhibit 4.1 to the Registrant’s Registration Statement on Form S-8 (Registration No. 333-107440)).
10.8	—	Credit Agreement between the Registrant, the financial institutions named therein and Bank of America, N.A., as administrative agent, dated April 30, 2004 (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q, filed August 9, 2004 (File No. 001-12074)).
10.9	—	Amendment No. 1 to the Credit Agreement between the Registrant, the financial institutions named therein and Bank of America, N.A., as administrative agent, dated December 14, 2004 (incorporated by reference to Exhibit 10.9 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2004 (File No. 001-12074)).
†10.10	—	Stone Energy Corporation 2004 Amended and Restated Stock Incentive Plan (incorporated by reference to the Registrant’s Registration Statement on Form S-8 (Registration No. 333-107440)).
†10.11	—	Stone Energy Corporation Revised (2005) Annual Incentive Compensation Plan (incorporated by reference to Exhibit 10.11 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2004 (File No. 001-12074)).
10.12	—	Amendment No. 2 to the Credit Agreement between the Registrant, the financial institutions named therein and Bank of America, N.A., as administrative agent, dated March 28, 2006 (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the period ending March 31, 2006 (File No. 001-12074)).
10.13	—	Amendment No. 3 and Waiver dated as of June 16, 2006 among Stone Energy Corporation, the banks party to the Credit Agreement and Bank of America, N.A., as Agent for the Banks (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated June 16, 2006 (File No. 001-12074)).
*10.14	—	Amendment No. 4 and Waiver to the Credit Agreement dated as of July 12, 2006 among Stone Energy Corporation, the financial institutions party to the Credit Agreement and Bank of America, N.A., as Agent for the Banks.
*10.15	—	Amendment No. 5 to the Credit Agreement dated as of December 31, 2006 among Stone Energy Corporation, the financial institutions party to the Credit Agreement and Bank of America, N.A. as Agent for the Banks.
10.16	—	Letter Agreement dated May 19, 2005 between Stone Energy Corporation and Kenneth H. Beer (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed May 24, 2005 (File No. 001-12074)).

38

10.17	—	Employment Agreement dated January 12, 2006 between Stone Energy Corporation and David H. Welch (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed January 18, 2006 (File No. 001-12074)).
10.18	—	Stone Energy Corporation Executive Severance Policy dated August 18, 2005 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed August 23, 2005 (File No. 001-12074)).
10.19	—	Stone Energy Corporation Executive Change in Control Severance Policy dated August 18, 2005 (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K, filed August 23, 2005 (File No. 001-12074)).
10.20	—	Stone Energy Corporation Executive Change of Control and Severance Plan dated November 16, 2006 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed November 20, 2006 (File No. 001-12074)).
10.21	—	Stone Energy Corporation Employee Change of Control Severance Plan dated November 16, 2006 (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K, filed November 20, 2006 (File No. 001-12074)).
†10.22	—	Stone Energy Corporation Deferred Compensation Plan (incorporated by reference to Exhibit 4.5 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2004 (File No. 001-12074)).
†10.23	—	Adoption Agreement between Fidelity Management Trust Company and Stone Energy Corporation for the Stone Energy Corporation Deferred Compensation Plan dated December 1, 2004 (incorporated by reference to Exhibit 4.6 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2004 (File No. 001-12074)).
16.1	—	Letter of Arthur Andersen LLP, dated June 26, 2002, regarding change in certifying accountant (incorporated by reference to Exhibit 16.1 to the Registrant’s Form 8-K, filed June 27, 2002 (File No. 001-12074)).
18.1	—	Letter of Ernst & Young LLP, dated May 13, 2003, regarding change in accounting principles (incorporated by reference to Exhibit 18.1 to the Registrant’s Quarterly Report on Form 10-Q, for the period ended March 31, 2003 (File No. 001-12074)).
*21.1	—	Subsidiaries of the Registrant.
*23.1	—	Consent of Independent Registered Public Accounting Firm.
*23.2	—	Consent of Netherland, Sewell & Associates, Inc.
*23.3	—	Consent of Ryder Scott Company, L.P.
*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.
†	Identifies management contracts and compensatory plans or arrangements.
#	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.

39

SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	STONE ENERGY CORPORATION
Date: February 26, 2007	By:	/s/ David H. Welch
		David H. Welch
		President and Chief Executive Officer

     Pursuant to the requirements of the Securities Exchange Act, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Signature	Title	Date
/s/ James H. Stone James H. Stone	Chairman of the Board	February 26, 2007
/s/ David H. Welch David H. Welch	President, Chief Executive Officer and Director (principal executive officer)	February 26, 2007
/s/ Kenneth H. Beer Kenneth H. Beer	Senior Vice President and Chief Financial Officer (principal financial officer)	February 26, 2007
/s/ J. Kent Pierret J. Kent Pierret	Senior Vice President, Chief Accounting Officer and Treasurer (principal accounting officer)	February 26, 2007
/s/ Robert A. Bernhard Robert A. Bernhard	Director	February 26, 2007
/s/ George R. Christmas George R. Christmas	Director	February 26, 2007
/s/ B.J. Duplantis B.J. Duplantis	Director	February 26, 2007
/s/ Raymond B. Gary Raymond B. Gary	Director	February 26, 2007
/s/ John P. Laborde John P. Laborde	Director	February 26, 2007
/s/ Kay G. Priestly Kay G. Priestly	Director	February 26, 2007
/s/ David R. Voelker David R. Voelker	Director	February 26, 2007

40

INDEX TO FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm	F-2
Consolidated Balance Sheet as of December 31, 2006 and 2005	F-3
Consolidated Statement of Operations for the years ended December 31, 2006, 2005 and 2004	F-4
Consolidated Statement of Cash Flows for the years ended December 31, 2006, 2005 and 2004	F-5
Consolidated Statement of Changes in Stockholders’ Equity for the years ended December 31, 2006, 2005 and 2004	F-6
Consolidated Statement of Comprehensive Income for the years ended December 31, 2006, 2005 and 2004	F-7
Notes to Consolidated Financial Statements	F-8

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Stockholders and Board of Directors
Stone Energy Corporation

We have audited the accompanying consolidated balance sheets of Stone Energy Corporation (the Company) as of December 31, 2006 and 2005, and the related consolidated statements of operations, cash flows, changes in stockholders’ equity and comprehensive income for each of the three years in the period ended December 31, 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Stone Energy Corporation as of December 31, 2006 and 2005, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 1 to the consolidated financial statements, in 2006 the Company changed its method of accounting for stock-based compensation.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Stone Energy Corporation’s internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 23, 2007, expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

New Orleans, Louisiana
February 23, 2007

F-2

STONE ENERGY CORPORATION
CONSOLIDATED BALANCE SHEET
(Amounts in thousands of dollars, except per share amounts)

	December 31,
	2006			2005
ASSETS
Current assets:
Cash and cash equivalents	$	58,862		$	79,708
Accounts receivable		241,829			211,685
Fair value of hedging contracts		11,017			7,471
Other current assets		965			2,795
Total current assets		312,673			301,659
Oil and gas properties — United States—full cost method of accounting:
Proved, net of accumulated depreciation, depletion and amortization of $2,706,936 and $1,880,180, respectively		1,569,947			1,564,312
Unevaluated		173,925			246,647
Oil and gas properties — China (unevaluated)		40,553			—
Building and land, net of accumulated depreciation of $1,331 and $1,167, respectively		5,811			5,521
Fixed assets, net of accumulated depreciation of $18,348 and $15,422, respectively		8,302			9,331
Other assets, net of accumulated depreciation and amortization of $5,550 and $2,896, respectively		17,260			12,847
Total assets	$	2,128,471		$	2,140,317
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable to vendors	$	120,532		$	160,682
Undistributed oil and gas proceeds		39,540			59,187
Asset retirement obligations		130,341			53,894
Other current liabilities		20,415			11,390
Total current liabilities		310,828			285,153
Long-term debt		797,000			563,000
Deferred taxes		94,560			231,961
Asset retirement obligations		210,035			113,043
Other long-term liabilities		4,408			3,037
Total liabilities		1,416,831			1,196,194
Commitments and contingencies
Common stock, $.01 par value; authorized 100,000,000 shares; issued 27,558,136 and 27,189,808 shares, respectively		276			272
Treasury stock (22,382 and 25,982 shares, respectively, at cost)		(1,161	)		(1,348	)
Additional paid-in capital		502,747			500,228
Unearned compensation		—			(15,068	)
Retained earnings		200,929			455,183
Accumulated other comprehensive income		8,849			4,856
Total stockholders’ equity		711,640			944,123
Total liabilities and stockholders’ equity	$	2,128,471		$	2,140,317

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

F-3

STONE ENERGY CORPORATION

CONSOLIDATED STATEMENT OF OPERATIONS

(Amounts in thousands of dollars, except per share amounts)

	Year Ended December 31,
	2006			2005			2004
Operating revenue:
Oil production	$	348,979		$	244,469		$	214,153
Gas production		337,321			391,771			330,048
Derivative income		2,688			—			—
Total operating revenue		688,988			636,240			544,201
Operating expenses:
Lease operating expenses		159,043			114,664			100,045
Production taxes		13,472			13,179			7,408
Depreciation, depletion and amortization		320,696			241,426			210,861
Write-down of oil and gas properties		510,013			—			—
Accretion expense		12,391			7,159			5,852
Salaries, general and administrative expenses		34,266			22,705			14,311
Incentive compensation expense		4,356			1,252			2,318
Derivative expense		—			3,388			4,099
Total operating expenses		1,054,237			403,773			344,894
Income (loss) from operations		(365,249	)		232,467			199,307
Other (income) expenses:
Interest		35,931			23,151			16,835
Other income		(7,186	)		(3,894	)		(4,018	)
Merger expense reimbursement		(51,500	)		—			—
Other expense		5			—			1,541
Merger expenses		50,029			—			—
Early extinguishment of debt		—			—			845
Total other expenses, net		27,279			19,257			15,203
Net income (loss) before income taxes		(392,528	)		213,210			184,104
Income tax provision (benefit):
Current		227			—			—
Deferred		(138,533	)		76,446			64,436
Total income taxes		(138,306	)		76,446			64,436
Net income (loss)	$	(254,222	)	$	136,764		$	119,668
Basic earnings (loss) per share	$	(9.29	)	$	5.07		$	4.50
Diluted earnings (loss) per share	$	(9.29	)	$	5.02		$	4.45
Average shares outstanding		27,366			26,951			26,586
Average shares outstanding assuming dilution		27,366			27,244			26,901

The accompanying notes are an integral part of this statement

F-4

STONE ENERGY CORPORATION

CONSOLIDATED STATEMENT OF CASH FLOWS

(Amounts in thousands of dollars)

	Year Ended December 31,
	2006			2005			2004
Cash flows from operating activities:
Net income (loss)	$	(254,222	)	$	136,764		$	119,668
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation, depletion and amortization		320,696			241,426			210,861
Write-down of oil and gas properties		510,013			—			—
Accretion expense		12,391			7,159			5,852
Deferred income tax provision (benefit)		(138,533	)		76,446			64,436
Non-cash stock compensation expense		4,358			—			—
Non-cash derivative expenses (income)		(377	)		—			4,099
Early extinguishment of debt		—			—			845
Other non-cash expenses		2,066			3,873			489
Increase in accounts receivable		(30,145	)		(24,605	)		(36,333	)
(Increase) decrease in other current assets		1,780			(752	)		(600	)
Increase in accounts payable		1,300			2,100			900
Increase (decrease) in other current liabilities		(11,682	)		22,424			5,404
Investment in derivative contracts		—			—			(1,683	)
Payments on asset retirement obligations		(18,545	)		(3,741	)		(4,159	)
Other		(65	)		119			(111	)
Net cash provided by operating activities		399,035			461,213			369,668
Cash flows from investing activities:
Investment in oil and gas properties		(657,878	)		(494,125	)		(484,936	)
Sale of proved properties		(38	)		1,549			11,948
Investment in fixed and other assets		(2,540	)		(7,356	)		(2,171	)
Net cash used in investing activities		(660,456	)		(499,932	)		(475,159	)
Cash flows from financing activities:
Proceeds from bank borrowings		85,000			126,000			128,000
Repayment of bank borrowings		(76,000	)		(45,000	)		(216,000	)
Issuance of 63/4% Senior Subordinated Notes		—			—			200,000
Proceeds from issuance of Senior Floating Rate Notes		225,000			—			—
Deferred financing costs		(3,283	)		(188	)		(7,107	)
Proceeds from exercise of stock options		9,858			13,358			7,755
Net cash provided by financing activities		240,575			94,170			112,648
Net increase (decrease) in cash and cash equivalents		(20,846	)		55,451			7,157
Cash and cash equivalents, beginning of year		79,708			24,257			17,100
Cash and cash equivalents, end of year	$	58,862		$	79,708		$	24,257
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest (net of amount capitalized)	$	31,982		$	22,560		$	15,945
Income taxes		227			—			—

The accompanying notes are an integral part of this statement.

F-5

STONE ENERGY CORPORATION

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(Amounts in thousands of dollars)

															Accumulated
						Additional									Other			Total
	Common		Treasury			Paid-In			Unearned			Retained			Comprehensive			Stockholders’
	Stock		Stock			Capital			Compensation			Earnings			Income (Loss)			Equity
Balance, December 31, 2003	$	264		($1,550	)	$	455,391		$	—		$	198,770			($8,763	)	$	644,112
Net income		—		—			—			—			119,668			—			119,668
Adjustment for fair value accounting of derivatives, net of tax		—		—			—			—			—			(525	)		(525	)
Exercise of stock options		3		—			7,752			—			—			—			7,755
Tax benefit from stock option exercises		—		—			1,821			—			—			—			1,821
Issuance of restricted stock		—		—			1,514			(1,514	)		—			—			—
Amortization of stock compensation expense		—		—			—			28			—			—			28
Issuance of treasury stock		—		88			—			—			(13	)		—			75
Balance, December 31, 2004		267		(1,462	)		466,478			(1,486	)		318,425			(9,288	)		772,934
Net income		—		—			—			—			136,764			—			136,764
Adjustment for fair value accounting of derivatives, net of tax		—		—			—			—			—			14,144			14,144
Exercise of stock options		5		—			13,400			—			—			—			13,405
Tax benefit from stock option exercises		—		—			3,796			—			—			—			3,796
Issuance of restricted stock		—		—			17,588			(17,588	)		—			—			—
Vesting of restricted stock		—		—			(47	)		—			—			—			(47	)
Cancellation of restricted stock.		—		—			(1,009	)		1,009			—			—			—
Tax benefit from restricted stock vesting		—		—			22			—			—			—			22
Amortization of stock compensation expense		—		—			—			2,997			—			—			2,997
Issuance of treasury stock		—		114			—			—			(6	)		—			108
Balance, December 31, 2005		272		(1,348	)		500,228			(15,068	)		455,183			4,856			944,123
Net loss		—		—			—			—			(254,222	)		—			(254,222	)
Adjustment for fair value accounting of derivatives, net of tax		—		—			—			—			—			3,993			3,993
Exercise of stock options		4		—			9,854			—			—			—			9,858
Vesting of restricted stock		—		—			(1	)		—			—			—			(1	)
Reverse unearned compensation on restricted stock		—		—			(15,068	)		15,068			—			—			—
Amortization of stock compensation expense		—		—			7,734			—			—			—			7,734
Issuance of treasury stock		—		187			—			—			(32	)		—			155
Balance, December 31, 2006	$	276		($1,161	)	$	502,747		$	—		$	200,929		$	8,849		$	711,640

The accompanying notes are an integral part of this statement.

F-6

STONE ENERGY CORPORATION

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(Amounts in thousands of dollars)

	Year Ended December 31,
	2006			2005		2004
Net income (loss)	$	(254,222	)	$	136,764	$	119,668
Other comprehensive income (loss) net of tax effect:
Adjustment for fair value accounting of derivatives, net of tax		3,993			14,144		(525	)
Comprehensive income (loss)	$	(250,229	)	$	150,908	$	119,143

The accompanying notes are an integral part of this statement.

F-7

STONE ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands of dollars, except per share and price amounts)

NOTE 1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

     Stone Energy is an independent oil and natural gas company engaged in the acquisition and subsequent exploration, development, and operation of oil and gas properties located in the conventional Gulf of Mexico (the “GOM”) shelf, the deep shelf of the GOM, deepwater of the GOM, the Rocky Mountain Basins and the Williston Basin. We are also engaged in an exploratory joint venture in Bohai Bay, China. Our corporate headquarters are located at 625 E. Kaliste Saloom Road, Lafayette, Louisiana 70508. We have additional offices in New Orleans, Houston, and Denver.

     A summary of significant accounting policies followed in the preparation of the accompanying consolidated financial statements is set forth below.

     Basis of Presentation:

     The financial statements include our accounts and the accounts of our wholly owned subsidiary. All intercompany balances have been eliminated. Certain prior year amounts have been reclassified to conform to current year presentation.

     Reserves and Financial Restatement:

     On October 6, 2005, as a result of reservoir level reviews conducted during August 2005 through early October 2005, we announced a downward revision of 171 billion cubic feet of natural gas equivalent (“Bcfe”) of estimated proved reserves. After additional analysis and additional consultation with outside engineering firms, the revision was increased to 237 Bcfe.

     Based on internal assessments and consultation with outside engineering firms, we concluded that 157 Bcfe of the negative reserve revisions should have been reflected in 2004 and prior periods and would require a revision of the historical reserve estimates included in our supplemental natural gas and oil operating data. Quantities of estimated proved reserves are used in determining financial statement amounts, including ceiling test charges and depletion, depreciation and amortization (“DD&A”). The revision of our historical reserve estimates required the restatement of the financial statement information derived from these estimates for the periods from 2001 to 2004 and the first two quarters of 2005.

     Additionally, in the process of the preparation of our Form 10-Q for September 30, 2005, it was determined that approximately $9,794 of unevaluated oil and gas property costs were inappropriately classified and should have been reclassified to proved oil and gas property costs in 2002.

     Use of Estimates:

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates are used primarily when accounting for depreciation, depletion and amortization, unevaluated property costs, estimated future net cash flows from proved reserves, cost to abandon oil and gas properties, taxes, reserves of accounts receivable, accruals of capitalized costs, operating costs and production revenue, capitalized employee, general and administrative expenses, effectiveness of financial instruments, the purchase price allocation on properties acquired and contingencies.

     Fair Value of Financial Instruments:

     The fair value of cash and cash equivalents, accounts receivable, accounts payable to vendors and our variable-rate bank debt approximated book value at December 31, 2006 and 2005. Our hedging contracts, including puts, swaps and zero-premium collars, are recorded in the financial statements at fair value in accordance with the Financial Accounting Standards Board’s (“FASB”) Statement of Financial Accounting Standard (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities.” The carrying amount of our bank debt approximated fair value because the interest rate is variable and reflective of market rates. As of December 31, 2006 and 2005, the fair value of our $200,000 8¹/4% Senior Subordinated Notes due 2011 was $198,500 and $206,500, respectively. As of December 31, 2006 and 2005, the fair value of our $200,000 6³/4% Senior Subordinated Notes due 2014 was $191,000 and $189,000, respectively. As of December 31, 2006, the fair value of our senior floating rate notes was $225,281. The fair values of our outstanding notes were determined based upon quotes obtained from brokers.

F-8

NOTE 1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)

     Cash and Cash Equivalents:

     We consider all money market funds and highly liquid investments in overnight securities through our commercial bank accounts, which result in available funds on the next business day, to be cash and cash equivalents.

     Oil and Gas Properties:

     We follow the full cost method of accounting for oil and gas properties. Under this method, all acquisition, exploration, development and estimated abandonment costs, including certain related employee and general and administrative costs (less any reimbursements for such costs) and interest incurred for the purpose of finding oil and gas are capitalized. Such amounts include the cost of drilling and equipping productive wells, dry hole costs, lease acquisition costs, delay rentals and other costs related to such activities. Employee, general and administrative costs that are capitalized include salaries and all related fringe benefits paid to employees directly engaged in the acquisition, exploration and development of oil and gas properties, as well as all other directly identifiable general and administrative costs associated with such activities, such as rentals, utilities and insurance. Fees received from managed partnerships for providing such services are accounted for as a reduction of capitalized costs. During 2006, 2005 and 2004, we capitalized salaries, general and administrative costs (net of reimbursements) in the amount of $23,323, $20,462 and $15,968, respectively. Employee, general and administrative costs associated with production operations and general corporate activities are expensed in the period incurred. Additionally, workover and maintenance costs incurred solely to maintain or increase levels of production from an existing completion interval are charged to lease operating expense in the period incurred. We capitalize a portion of the interest costs incurred on our debt that is calculated based upon the balance of our unevaluated property costs and our weighted-average borrowing rate. During 2006, 2005 and 2004, we capitalized interest costs of $18,221, $14,877 and $6,957, respectively.

     Generally accepted accounting principles allow the option of two acceptable methods for accounting for oil and gas properties. The successful efforts method is the allowable alternative to the full cost method. The primary differences between the two methods are in the treatment of exploration costs and in the computation of DD&A. Under the full cost method, all exploratory costs are capitalized while under the successful efforts method exploratory costs associated with unsuccessful exploratory wells and all geological and geophysical costs are expensed. Under full cost accounting, DD&A is computed on cost centers represented by entire countries while under successful efforts cost centers are represented by properties, or some reasonable aggregation of properties with common geological structural features or stratigraphic condition, such as fields or reservoirs.

     We amortize our investment in oil and gas properties through DD&A using the units of production (“UOP”) method. Under the UOP method, the quarterly provision for DD&A is computed by dividing production volumes for the period by the total proved reserves as of the beginning of the period, and applying the respective rate to the net cost of proved oil and gas properties, including future development costs.

     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 (See Note 4).

     Sales of oil and gas properties are accounted for as adjustments to the net full cost pool with no gain or loss recognized, unless the adjustment would significantly alter the relationship between capitalized costs and proved reserves.

     On September 28, 2004, the SEC adopted Staff Accounting Bulletin (“SAB”) No. 106, which expressed its views regarding the application of SFAS No. 143 by oil and gas companies following the full cost accounting method. SAB No. 106 indicates that estimated dismantlement and abandonment costs that will be incurred as a result of future development activities on proved reserves are to be included in the estimated future cash flows in the full cost ceiling test. SAB No. 106 also indicates that these estimated costs are to be included in the costs to be amortized. We began applying SAB No. 106 prospectively in the third quarter of 2004.

     Asset Retirement Obligations:

     Our accounting for asset retirement obligations is governed by SFAS No. 143, “Accounting for Asset Retirement Obligations”. This statement requires us to record our estimate of the fair value of liabilities related to future asset retirement obligations in the period the obligation is incurred. Asset retirement obligations relate to the removal of facilities and tangible equipment at the end of an oil and gas property’s useful life. The adoption of SFAS No. 143 requires the use of management’s estimates with respect to future abandonment costs, inflation, market risk premiums, useful life and cost of capital. As required by SFAS No. 143, our estimate of our asset retirement obligations does not give consideration to the value the related assets could have to other parties.

F-9

NOTE 1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)

     Building and Land:

     Building and land are recorded at cost. Our Lafayette office building is being depreciated on the straight-line method over its estimated useful life of 39 years.

     Fixed Assets:

     Fixed assets at December 31, 2006 and 2005 included approximately $4,973 and $6,010, respectively, of computer hardware and software costs, net of accumulated depreciation. These costs are being depreciated on the straight-line method over an estimated useful life of five years.

     Earnings Per Common Share:

     Earnings per common share were calculated by dividing net income applicable to common stock by the weighted-average number of common shares outstanding during the year. Earnings per common share assuming dilution were calculated by dividing net income applicable to common stock by the weighted-average number of common shares outstanding during the year plus the weighted-average number of outstanding dilutive stock options and restricted stock granted to outside directors, officers and employees. There were no dilutive shares for the year ended December 31, 2006 because we had a net loss for the year. There were approximately 293,000 and 315,000 weighted-average dilutive shares for the years ending December 31, 2005 and 2004, respectively. Options that were considered antidilutive because the exercise price of the stock exceeded the average price for the applicable period totaled approximately 602,000, 562,000 and 786,000 shares during 2006, 2005 and 2004, respectively. During the years ended December 31, 2006, 2005 and 2004, approximately 372,000, 483,000 and 278,000 shares of common stock, respectively, were issued, from either authorized shares or shares held in treasury, upon the exercise of stock options and vesting of restricted stock by employees and non-employee directors and the awarding of employee bonus stock under the 2004 Amended and Restated Stock Incentive Plan.

     Production Revenue:

     We recognize production revenue under the Entitlement method of accounting. Under this method, revenue is deferred for deliveries in excess of the company’s net revenue interest, while revenue is accrued for the undelivered volumes. Production imbalances are generally recorded at the estimated sales price in effect at the time of production.

     Income Taxes:

     Income taxes are accounted for in accordance with the SFAS No. 109, “Accounting for Income Taxes”. Provisions for income taxes include deferred taxes resulting primarily from temporary differences due to different reporting methods for oil and gas properties for financial reporting purposes and income tax purposes. For financial reporting purposes, all exploratory and development expenditures, including future abandonment costs, related to evaluated projects are capitalized and depreciated, depleted and amortized on the UOP method. For income tax purposes, only the equipment and leasehold costs relative to successful wells are capitalized and recovered through depreciation or depletion. Generally, most other exploratory and development costs are charged to expense as incurred; however, we follow certain provisions of the Internal Revenue Code that allow capitalization of intangible drilling costs where management deems appropriate. Other financial and income tax reporting differences occur as a result of statutory depletion, different reporting methods for sales of oil and gas reserves in place, different reporting methods used in the capitalization of employee, general and administrative and interest expenses, and different reporting methods for stock-based compensation.

     Derivative Instruments and Hedging Activities:

     Under SFAS No. 133, as amended, the nature of a derivative instrument must be evaluated to determine if it qualifies for hedge accounting treatment. Instruments qualifying for hedge accounting treatment are recorded as an asset or liability measured at fair value and subsequent changes in fair value are recognized in equity through other comprehensive income, net of related taxes, to the extent the hedge is effective. The cash settlement of effective cash flow hedges is recorded in oil and gas revenue. Instruments not qualifying for hedge accounting treatment are recorded in the balance sheet and changes in fair value are recognized in earnings as derivative expense (income). See Note 13 — “Hedging Activities.”

F-10

NOTE 1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)

     Stock-Based Compensation:

     On December 16, 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment”, which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 123(R) supersedes Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees”, and amends SFAS No. 95, “Statement of Cash Flows.” SFAS No. 123(R) became effective for us on January 1, 2006. We have elected to adopt the requirements of SFAS No. 123(R) using the “modified prospective” method. Under this method, compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS No. 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of SFAS No. 123 for all awards granted prior to the effective date of SFAS No. 123(R) that remain unvested on the effective date. The net effect of the implementation of SFAS No. 123(R) on net income for the year ended December 31, 2006 was immaterial.

     The implementation of SFAS No. 123(R) impacted our 2006 financial statements as follows:

• Expense amounts related to stock option issuances are now expensed in the income statement prospectively as opposed to the pro forma disclosures previously presented in prior periods. Expense amounts on stock options to be incurred in future periods will be contingent upon several factors including the number of options issued and capitalization rates and therefore, prior pro forma amounts should not be assumed to be necessarily indicative of future expense amounts.

• Unearned Compensation and Additional Paid-In Capital balances related to our restricted stock issuances have been reversed.

• The tax benefits from the vesting of restricted stock and the exercise of stock options will no longer be recorded as an addition to Additional Paid-In Capital until we are in a current tax paying position. Presently, a majority of our income taxes are being deferred and we have substantial net operating losses available for carryover to future periods.

     Recent Accounting Developments:

     On July 13, 2006, the FASB issued its Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. It also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 will be effective for fiscal years beginning after December 15, 2006.

     On September 15, 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. SFAS No.157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosure about fair value measurements. SFAS No.157 will be effective for financial statements issued for fiscal years beginning after November 15, 2007.

     On September 29, 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans”. SFAS No. 158 requires an employer to recognize the over-funded or under-funded status of a defined benefit post-retirement plan as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of the entity. SFAS No. 158 is effective for us as of the end of the fiscal year ending after December 31, 2006.

     The SEC issued SAB No. 108, “Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements”, on September 13, 2006. SAB No. 108 expresses the staff’s views regarding the process of quantifying financial statement misstatements in determining materiality. The guidance in this SAB is effective for fiscal years ending after November 15, 2006.

     We do not anticipate that the implementation of these new standards will have a material effect on our financial statements.

     In February of 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Liabilities – Including an amendment of FASB Statement No. 115”. SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. This statement will be effective for us January 1, 2008. We have not yet determined the impact, if any, that adopting this standard may have on our financial statements.

F-11

NOTE 2 — ACCOUNTS RECEIVABLE:

     In our capacity as operator for our co-venturers, we incur drilling and other costs that we bill to the respective parties based on their working interests. We also receive payments for these billings and, in some cases, for billings in advance of incurring costs. Our accounts receivable are comprised of the following amounts:

	As of December 31,
	2006		2005
Accounts Receivable:
Other co-venturers	$	11,837	$	10,224
Trade		93,987		107,855
Insurance receivable on hurricane claims		130,205		93,192
Officers and employees		3		2
Unbilled accounts receivable		5,797		412
	$	241,829	$	211,685

     We have accrued insurance claims receivable related to Hurricanes Katrina and Rita to the extent we have concluded the insurance recovery is probable. The accrual is for all costs previously recorded in our financial statements including Asset Retirement Obligations and repair expenses including in Lease Operating Expenses. We have not accrued for costs to be incurred in future periods.

NOTE 3 — CONCENTRATIONS:

Sales to Major Customers

     Our production is sold on month-to-month contracts at prevailing prices. We have attempted to diversify our sales and obtain credit protections such as parental guarantees from certain of our purchasers. The following table identifies customers from whom we derived 10% or more of our total oil and gas revenue during the following years ended:

	December 31,
	2006			2005			2004
BP Energy Company		(a	)		(a	)		12	%
Cinergy Marketing and Trading		(a	)		(a	)		11	%
Conoco, Inc.		12	%		10	%		13	%
Equiva Trading Company		(a	)		(a	)		11	%
Sequent Energy Management LP		10	%		10	%		—
Shell Trading (US) Company		13	%		(a	)		(a	)
Total Gas & Power North America, Inc.		(a	)		12	%		12	%

(a) Less than 10 percent

     The maximum amount of credit risk exposure at December 31, 2006 relating to these customers amounted to $20,825.

     We believe that the loss of any of these purchasers would not result in a material adverse effect on our ability to market future oil and gas production.

Production and Reserve Volumes

     Approximately 69% (unaudited) of our estimated proved reserves at December 31, 2006 and 85% of our production during 2006 were associated with our Gulf Coast Basin properties.

Cash Deposits

     Substantially all of our cash balances are in excess of federally insured limits.

F-12

NOTE 4 — INVESTMENT IN OIL AND GAS PROPERTIES:

     The following table discloses certain financial data relative to our oil and gas producing activities located onshore and offshore the continental United States and Bohai Bay, China (which to date is not significant enough to warrant separate segmental reporting):

	Year Ended December 31,
	2006			2005			2004
Oil and gas properties—
Balance, beginning of year	$	3,691,138		$	3,157,670		$	2,636,512
Costs incurred during the year:
Capitalized—
Acquisition costs, net of sales of unevaluated properties		228,108			138,080			201,550
Exploratory costs		160,371			156,472			151,571
Development costs (1)		370,201			203,577			145,111
Salaries, general and administrative costs and interest		42,023			35,939			23,395
Less: overhead reimbursements		(480	)		(600	)		(469	)
Total costs incurred during year		800,223			533,468			521,158
Balance, end of year	$	4,491,361		$	3,691,138		$	3,157,670
(1)    Includes asset retirement costs of $161,048, $53,687 and $19,950, respectively.
Charged to expense—
Lease operating expenses	$	159,043		$	114,664		$	100,045
Production taxes		13,472			13,179			7,408
Accretion expense		12,391			7,159			5,852
	$	184,906		$	135,002		$	113,305
Unevaluated oil and gas properties—
Costs incurred during year:
Acquisition costs	$	16,007		$	87,486		$	43,268
Exploration costs		40,877			37,841			23,022
Capitalized interest		15,893			14,391			5,114
	$	72,777		$	139,718		$	71,404
Accumulated depreciation, depletion and amortization—
Balance, beginning of year		($1,880,180	)		($1,640,362	)		($1,420,371	)
Provision for DD&A		(316,781	)		(238,269	)		(208,043	)
Write-down of oil and gas properties		(510,013	)		—			—
Sale of proved properties		38			(1,549	)		(11,948	)
Balance, end of year		($2,706,936	)		($1,880,180	)		($1,640,362	)
Net capitalized costs (proved and unevaluated)	$	1,784,425		$	1,810,958		$	1,517,308
DD&A per Mcfe	$	4.11		$	2.87		$	2.36

     At December 31, 2006, our ceiling test computation (See Note 1) resulted in a write-down of oil and gas properties of $510,013 based on a December 31, 2006 Henry Hub gas price of $5.635 per MMBtu and a West Texas Intermediate oil price of $61.05 per barrel. The benefit of hedges in place at December 31, 2006 reduced the write-down by $36,458 net of taxes.

F-13

NOTE 4 — INVESTMENT IN OIL AND GAS PROPERTIES: (Continued)

     The following table discloses financial data associated with unevaluated costs at December 31, 2006:

			Net Costs incurred (evaluated) during the
	Balance as of		year ended December 31,
	December 31,								2003
	2006		2006		2005		2004		and prior
Acquisition costs	$	146,168	$	16,007	$	93,426	$	18,966	$	17,769
Exploration costs		40,891		40,877		14		—		—
Capitalized interest		27,419		15,893		9,053		1,091		1,382
Total unevaluated costs	$	214,478	$	72,777	$	102,493	$	20,057	$	19,151

     Of the total unevaluated costs at December 31, 2006, approximately $40,553 related to investment in Bohai Bay, China and $34,157 related to investment in the Williston Basin in Montana and North Dakota, both of which we anticipate to be evaluated over the next 18 months. The excluded costs will be included in the amortization base as the properties are evaluated and proved reserves are established or impairment is determined. Interest costs capitalized on unevaluated properties during the years ended December 31, 2006, 2005 and 2004 totaled $18,221, $14,877 and $6,957, respectively.

NOTE 5 — ASSET RETIREMENT OBLIGATIONS:

     Asset retirement obligations relate to the removal of facilities and tangible equipment at the end of a property’s useful life. SFAS No. 143 requires that the fair value of a liability to retire an asset be recorded on the balance sheet and that the corresponding cost is capitalized in oil and gas properties. The ARO liability is accreted to its future value and the capitalized cost is depreciated consistent with the UOP method. As required by SFAS No. 143, our estimate of our asset retirement obligations does not give consideration to the value the related assets could have to other parties.

     The change in our ARO during 2006, 2005 and 2004 is set forth below:

	Year Ended December 31,
	2006			2005			2004
Asset retirement obligations as of the beginning of the year	$	166,937		$	106,091		$	80,288
Liabilities incurred		10,326			7,461			27,173
Liabilities settled		(18,545	)		(3,741	)		(2,719	)
Accretion expense		12,391			7,159			5,852
Revision of estimates		169,267			49,967			(4,503	)
Asset retirement obligations as of the end of the year, including current portion	$	340,376		$	166,937		$	106,091

NOTE 6 — INCOME TAXES:

     An analysis of our deferred taxes follows:

	As of December 31,
	2006			2005
Net operating loss carryforward	$	34,653		$	42,109
Statutory depletion carryforward		5,471			5,278
Contribution carryforward		—			377
Alternative minimum tax credit carryforward		909			682
Temporary differences:
Oil and gas properties — full cost		(133,670	)		(278,806	)
Hedges		(4,941	)		(2,631	)
Other		(688	)		(1,240	)
Valuation allowance		—			(377	)
		($98,266	)		($234,608	)

     For tax reporting purposes, operating loss carryforwards totaled approximately $101,561 at December 31, 2006. If not utilized, such carryforwards would begin expiring in 2018 and would completely expire by the year 2026. In addition, we had approximately $16,292 in statutory depletion deductions available for tax reporting purposes that may be carried forward indefinitely. Recognition of a deferred tax asset associated with these carryforwards is dependent upon our evaluation that it is more likely than not that the asset will ultimately be realized.

F-14

NOTE 6 — INCOME TAXES: (Continued)

     As of December 31, 2006 and 2005, a deferred tax liability of $3,706 and $2,646, respectively, was included in other current liabilities.

     Reconciliation between the statutory federal income tax rate and our effective income tax rate as a percentage of income before income taxes follows:

	Year Ended December 31,
	2006			2005			2004
Income tax expense computed at the statutory federal income tax rate		(35.0	%)		35.0	%		35.0	%
State taxes and other		(0.1	)		0.9			—
Reversal of valuation allowance		(0.1	)		—			—
Effective income tax rate		(35.2	%)		35.9	%		35.0	%

     Income taxes allocated to accumulated other comprehensive income related to oil and gas hedges amounted to $2,192, $7,615 and ($282) for the years ended December 31, 2006, 2005 and 2004, respectively.

NOTE 7 — LONG-TERM DEBT:

     Long-term debt consisted of the following:

	As of December 31,
	2006		2005
81/4% Senior Subordinated Notes due 2011	$	200,000	$	200,000
63/4% Senior Subordinated Notes due 2014		200,000		200,000
Senior Floating Rate Notes due 2010		225,000		—
Bank debt		172,000		163,000
Total long-term debt	$	797,000	$	563,000

     On June 28, 2006, we closed a private placement of $225,000 aggregate principal amount of senior floating rate notes due 2010. Net proceeds from the sale of the notes were $222,188. The notes bear interest at a rate per annum, reset quarterly, equal to LIBOR plus the applicable margin, initially 2.75%. The applicable margin will increase by 1% on July 15, 2007. Interest will be payable on January 15th, April 15th, July 15th and October 15th of each year, commencing on October 15th, 2006. The notes have a final maturity date of July 15, 2010. The notes are unsecured senior obligations and are subordinated to all of our secured debt, including indebtedness under our credit facility, and all indebtedness and other obligations of our subsidiaries. The notes rank pari passu in right of payment to all of our existing and future senior indebtedness. The notes will be required to be redeemed, in whole, after the occurrence of any Change of Control (as defined in the Indenture governing the notes), at the principal amount of the notes plus accrued and unpaid interest to the date of redemption. The notes provide for certain covenants, which include, without limitation, restrictions on liens, indebtedness, asset sales, dividend payments and other restricted payments. The violation of any of these covenants could give rise to a default, which if not cured could give the holder of the notes a right to accelerate payment. At December 31, 2006, $3,910 had been accrued in connection with the January 15, 2007 interest payment.

     On March 28, 2006, the bank credit facility was amended whereby we granted a valid, perfected, first-priority lien in favor of the participating banks on the majority of our oil and gas properties. On June 28, 2006, in conjunction with the issuance of our senior floating rate notes, the borrowing base under our bank credit facility was reduced to $250,000. On July 14, 2006, the borrowing base under the credit facility was increased to $325,000 in connection with the preferential rights acquisition of additional working interests in Mississippi Canyon Blocks 109 and 108 (see Note 11). Effective December 31, 2006, the credit facility was amended to change the definitions of the terms “EBITDA”, “Net Income” and “Tangible Net Worth”. Borrowings outstanding at December 31, 2006 under the facility totaled $172,000, and letters of credit totaling $52,821 had been issued under the facility. At December 31, 2006, we had $100,179 of borrowings available under the credit facility and the weighted average interest rate was approximately 6.9% per annum. The borrowing base under the credit facility is re-determined periodically based on the bank group’s evaluation of our proved oil and gas reserves.

     The credit facility matures on April 30, 2008. At February 14, 2007, we had a borrowing base under the credit facility of $325,000 with availability of an additional $100,179 of borrowings. Interest rates are tied to LIBOR rates plus a margin that fluctuates based upon the ratio of aggregate outstanding borrowings and letters of credit exposure to the total borrowing base. Commitment fees are computed and payable quarterly at the rate of 50 basis points of borrowing availability. The borrowing base limitation is re-determined periodically and is based on a borrowing base amount established by the banks for our oil and gas properties.

F-15

NOTE 7 — LONG-TERM DEBT: (Continued)

     Under the financial covenants of our credit facility, we must (i) maintain a ratio of consolidated debt to consolidated EBITDA, as defined in the amended credit agreement, for the preceding four quarterly periods of not greater than 3.25 to 1 and (ii) maintain a Consolidated Tangible Net Worth (as defined). In addition, the credit facility places certain customary restrictions or requirements with respect to disposition of properties, incurrence of additional debt, change of ownership and reporting responsibilities. These covenants may limit or prohibit us from paying cash dividends. The violation of any of these covenants could give rise to a default, which if not cured could give the lenders under the facility a right to accelerate payment.

     On December 15, 2004, we issued $200,000 6³/4% Senior Subordinated Notes due 2014. The notes were sold at par value and we received net proceeds of $195,500 and are subordinated to our senior unsecured credit facility and rank pari passu with our 8¹/4% Senior Subordinated Notes. There is no sinking fund requirement and the notes are redeemable at our option, in whole but not in part, at any time before December 15, 2009 at a Make-Whole Amount. Beginning December 15, 2009, the notes are redeemable at our option, in whole or in part, at 103.375% of their principal amount and thereafter at prices declining annually to 100% on and after December 15, 2012. In addition, before December 15, 2007, we may redeem up to 35% of the aggregate principal amount of the notes issued with net proceeds from an equity offering at 106.75%. The notes provide for certain covenants, which include, without limitation, restrictions on liens, indebtedness, asset sales, dividend payments and other restricted payments. The violation of any of these covenants could give rise to a default, which if not cured could give the holder of the notes a right to accelerate payment. At December 31, 2006, $713 had been accrued in connection with the June 15, 2007 interest payment.

     On December 5, 2001, we issued $200,000 8¹/4% Senior Subordinated Notes due 2011. The notes were sold at par value and we received net proceeds of $195,500 and are subordinated to our senior unsecured credit facility and rank pari passu with our 6³/4% Senior Subordinated Notes. There is no sinking fund requirement and the notes are redeemable at our option, in whole but not in part, at any time before December 15, 2006 at a Make-Whole Amount. Beginning December 15, 2006, the notes are redeemable at our option, in whole or in part, at 104.125% of their principal amount and thereafter at prices declining annually to 100% on and after December 15, 2009. The notes provide for certain covenants, which include, without limitation, restrictions on liens, indebtedness, asset sales, dividend payments and other restricted payments. The violation of any of these covenants could give rise to a default, which if not cured could give the holder of the notes a right to accelerate payment. At December 31, 2006, $871 had been accrued in connection with the June 15, 2007 interest payment.

     Other assets at December 31, 2006 and 2005 included approximately $10,411 and $9,784, respectively, of deferred financing costs, net of accumulated amortization, related primarily to the issuance of the senior floating rate notes, the 8¹/4% notes, the 6³/4% notes and the bank credit facility. The costs associated with the senior floating rate notes, the 8¹/4% notes and the 6³/4% notes are being amortized over the life of the notes using a method that applies effective interest rates of 9.2%, 8.6% and 7.1%, respectively. The costs associated with the credit facility are being amortized over the term of the facility.

     Total interest cost incurred on all obligations for the years ended December 31, 2006, 2005 and 2004 was $54,152, $38,100 and $23,800 respectively.

NOTE 8 — STOCK-BASED COMPENSATION:

     On December 16, 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment”, which is a revision of SFAS No. 123. SFAS No. 123(R) supersedes APB Opinion No. 25 and amends SFAS No. 95, “Statement of Cash Flows”. SFAS No. 123(R) became effective for us on January 1, 2006.

     We have elected to adopt the requirements of SFAS No. 123(R) using the “modified prospective” method. Under this method, compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS No. 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of SFAS No. 123 for all awards granted prior to the effective date of SFAS No. 123(R) that remain unvested on the effective date. For the year ended December 31, 2006, we incurred $9,190 of stock-based compensation, of which $5,452 related to restricted stock issuances, $3,584 related to stock option grants and $154 related to employee bonus stock awards and of which a total of approximately $4,136 was capitalized into Oil and Gas Properties. Because of the non-cash nature of stock based compensation, the expensed portion of stock based compensation is added back to the net loss in arriving at net cash provided by operating activities in our statement of cash flow. The capitalized portion is not included in net cash used in investing activities. The net effect of the implementation of SFAS No. 123(R) on net income for the year ended December 31, 2006 was immaterial.

F-16

NOTE 8 — STOCK-BASED COMPENSATION: (Continued)

     For the years ended December 31, 2005, and 2004, if stock-based compensation expense had been determined consistent with the expense recognition provisions under SFAS No. 123, our net income, basic earnings per share and diluted earnings per share would have approximated the pro forma amounts below:

	Year Ended			Year Ended
	December 31, 2005			December 31, 2004
	(In thousands, except per share amounts)
Net income	$	136,764		$	119,668
Add: Stock-based compensation expense included in net income, net of tax		909			18
Less: Stock-based compensation expense using fair value method, net of tax		(2,601	)		(2,506	)
Pro forma net income	$	135,072		$	117,180
Basic earnings per share	$	5.07		$	4.50
Pro forma basic earnings per share	$	5.01		$	4.41
Diluted earnings per share	$	5.02		$	4.45
Pro forma diluted earnings per share	$	4.96		$	4.36

     Under our 2004 Amended and Restated Stock Incentive Plan (the “Plan”), we may grant both incentive stock options qualifying under Section 422 of the Internal Revenue Code and options that are not qualified as incentive stock options to all employees and directors. All such options must have an exercise price of not less than the fair market value of the common stock on the date of grant and may not be re-priced without stockholder approval. Stock options to all employees vest ratably over a five-year service-vesting period and expire ten years subsequent to award. Stock options issued to non-employee directors vest ratably over a three-year service-vesting period and expire ten years subsequent to award. In addition, the Plan provides that shares available under the Plan may be granted as restricted stock. Restricted stock typically vests over a three-year period.

     Stock Options. Stock options granted and related fair values for the years ended December 31, 2006, 2005 and 2004 are listed in the following table. Fair value for the years ended December 31, 2006, 2005 and 2004, was determined using the Black-Scholes option pricing model with the following assumptions:

	2006			2005			2004
Stock options granted		15,000			85,500			282,250
Fair value of stock options granted ($ in thousands)	$	314		$	1,780		$	5,678
Weighted average grant date fair value	$	20.90		$	20.81		$	20.12
Assumptions:
Dividend yield		0.00	%		0.00	%		0.00	%
Expected volatility		36.59	%		36.47	%		39.92	%
Risk-free rate		4.58	%		3.84	%		3.90	%
Expected option life	6.0 years			6.0 years			6.0 years
Forfeiture rate		10.00	%		0.00	%		0.00	%

     Expected volatility and expected option life are based on a historical average. The risk-free rate is based on quoted rates on zero-coupon Treasury Securities for terms consistent with the expected option life.

F-17

NOTE 8 — STOCK-BASED COMPENSATION: (Continued)

A summary of stock option activity under the Plan during the year ended December 31, 2006 is as follows:

	Number						Aggregate
	of			Wgtd. Avg.		Wgtd. Avg.	Intrinsic
	Options			Exer. Price		Term	Value
Options outstanding, beginning of period		1,902,062		$	41.99
Granted		15,000			47.75
Exercised		(290,219	)		33.96		$	3,545
Forfeited		(107,077	)		37.63
Expired		(124,931	)		55.29
Options outstanding, end of period		1,394,835			42.87	4.5 years	$	759
Options exercisable, end of period		1,018,716			43.15	3.6 years		751
Options unvested, end of period		376,119			42.09	7.0 years		8

Exercise prices for stock options outstanding at December 31, 2006 range from $25.75 to $61.93.

A summary of stock option activity under the Plan during the year ended December 31, 2005 is as follows:

	Number						Aggregate
	of			Wgtd. Avg.		Wgtd. Avg.	Intrinsic
	Options			Exer. Price		Term	Value
Options outstanding, beginning of period		2,541,135		$	39.47
Granted		85,500			49.54
Exercised		(486,127	)		29.00		$	10,845
Forfeited		(154,163	)		37.73
Expired		(84,283	)		56.43
Options outstanding, end of period		1,902,062			41.99	5.7 years	$	6,496
Options exercisable, end of period		1,160,669			42.72	4.5 years		3,114
Options unvested, end of period		741,993			40.84	7.5 years		3,382

A summary of stock option activity under the Plan during the year ended December 31, 2004 is as follows:

	Number						Aggregate
	of			Wgtd. Avg.		Wgtd. Avg.	Intrinsic
	Options			Exer. Price		Term	Value
Options outstanding, beginning of period		2,735,559		$	37.92
Granted		282,250			46.16
Exercised		(296,107	)		29.34		$	5,203
Forfeited		(180,567	)		42.97
Expired		—			—
Options outstanding, end of period		2,541,135			39.47	4.1 years	$	13,998
Options exercisable, end of period		1,372,416			38.79	3.1 years		8,490
Options unvested, end of period		1,168,719			40.27	5.3 years		5,508

     Common stock issued upon the exercise of non-qualified stock options results in a tax deduction for us equivalent to the compensation income recognized by the option holder. Prior to the adoption of SFAS No. 123(R) for financial reporting purposes, the tax effect of this deduction was accounted for as a credit to additional paid-in capital rather than as a reduction of income tax expense. The exercise of stock options during 2005 and 2004 resulted in a tax benefit to us of approximately $3,796 and $1,821, respectively. The adoption of SFAS No. 123(R) limits this benefit for financial reporting purposes to those entities not in a net operating loss position. Consequently, for 2006 we have not recorded this benefit.

     Restricted Stock. During the year ended December 31, 2006, we issued 151,150 shares of restricted stock valued at $6,220. The fair value of restricted shares is determined based on the average of the high and low prices on the issuance date and assumes a 5% forfeiture rate in 2006. During the year ended December 31, 2005, we issued 338,000 shares of restricted stock valued at $17,589 and during the year ended December 31, 2004, we issued 33,710 shares of restricted stock valued at $1,514.

F-18

NOTE 8 — STOCK-BASED COMPENSATION: (Continued)

     A summary of the restricted stock activity under the Plan for the years ended December 31, 2006, 2005 and 2004 is as follows:

	2006					2005					2004
	Number of			Wgtd. Avg.		Number of			Wgtd. Avg.		Number of		Wgtd. Avg.
	Restricted			Fair Value		Restricted			Fair Value		Restricted		Fair Value
	Shares			Per Share		Shares			Per Share		Shares		Per Share
Restricted stock outstanding, beginning of period		344,038		$	51.52		33,710		$	44.91		—	$	—
Issuances		151,150			41.15		338,000			52.04		33,710		44.91
Lapse of restrictions		(106,261	)		51.39		(8,272	)		44.76		—		—
Forfeitures		(60,480	)		50.50		(19,400	)		52.01		—		—
Restricted stock outstanding, end of period		328,447			46.97		344,038			51.52		33,710		44.91

     As of December 31, 2006, there was $17,055 of unrecognized compensation cost related to all non-vested share-based compensation arrangements under the Plan. That cost is being amortized on a straight-line basis over the vesting period and is expected to be recognized over a weighted-average period of 2.0 years. Subsequent to December 31, 2006, 151,400 shares of restricted stock and 25,000 stock options were granted under the Plan.

NOTE 9 — TERMINATED MERGERS:

     Included in the year-to-date 2006 net loss is $51,500 in merger expense reimbursements partially offset by $50,029 in merger related expenses. Merger expenses include a $43,500 termination fee incurred in connection with the proposed merger with EPL. Prior to entering into the EPL Merger Agreement, we terminated our merger agreement with Plains Exploration and Production Company (“Plains”) and Plains Acquisition Corp. (“Plains Acquisition”) on June 22, 2006. As required under the terms of the terminated merger agreement among Stone, Plains and Plains Acquisition, Plains was entitled to a termination fee of $43,500 (“Plains Termination Fee”), which was advanced by EPL to Plains on June 22, 2006. Pursuant to the EPL Merger Agreement, we were obligated to repay all or a portion of this termination fee under certain circumstances if the EPL merger was not consummated. The $43,500 termination fee was recorded as merger expenses in the income statement during the second quarter of 2006. Of this amount, $25,300 was potentially reimbursable to EPL under certain circumstances described in the EPL Merger Agreement and therefore was recorded as deferred revenue on the balance sheet as of June 30, 2006 and September 30, 2006. The remaining $18,200 of the termination fee was recorded as merger expense reimbursement in the income statement during the three months ended June 30, 2006.

     On October 11, 2006, we entered into an agreement with EPL and EPL Acquisition pursuant to which the EPL Merger Agreement was terminated. Pursuant to the termination of the EPL Merger Agreement, EPL paid us $8,000 and released all claims to the $43,500 Plains Termination Fee. The $8,000 fee paid to us by EPL in conjunction with the termination of the EPL Merger Agreement was recorded as merger expense reimbursement in the income statement in the fourth quarter of 2006. Additionally, the remaining $25,300 of the Plains Termination Fee was recognized as merger expense reimbursement in earnings in the fourth quarter of 2006.

NOTE 10 — INTERNATIONAL OPERATIONS:

     During 2006, we entered into an agreement to participate in the drilling of two exploratory wells on two offshore concessions in Bohai Bay, China. After the drilling of the two wells, it has been determined that additional drilling will be necessary to evaluate the commercial viability of this project. We have the potential to earn an interest in 750,000 acres on these two concessions. Included in unevaluated oil and gas property costs at December 31, 2006 are $40,553 of capital expenditures related to our properties in Bohai Bay, China.

NOTE 11 — PROPERTY ACQUISITION:

     On July 14, 2006, we completed a $188,106 acquisition after post-closing adjustments of additional working interests in Mississippi Canyon Blocks 109 and 108. The acquisition was financed with a portion of the proceeds from the private placement of $225,000 aggregate principal amount of senior floating rate notes due 2010 (see Note 7). With the acquisition, we increased our working interest in Mississippi Canyon Block 109 from 33% to 100% and in Mississippi Canyon Block 108 from 16.5% to 24.8%.

NOTE 12 — TRANSACTIONS WITH RELATED PARTIES:

     James H. Stone, our chairman of the board of directors, owns up to 7.5% of the working interest in certain wells drilled on Section 19 on the east flank of the Weeks Island Field. This interest was acquired prior to our initial public offering in 1993. In his capacity as a working interest owner, he is required to pay his proportional share of all costs and is entitled to receive his proportional share of revenue.

F-19

NOTE 12 — TRANSACTIONS WITH RELATED PARTIES: (Continued)

     Our interests in certain oil and gas properties are burdened by net profits interests and overriding royalty interests granted at the time of acquisition to certain of our former officers. Such net profit interest owners do not receive any cash distributions until we have recovered all acquisition, development, financing and operating costs. D. Peter Canty, a former director and former President and Chief Executive Officer, and James H. Prince, former Executive Vice President and Chief Financial Officer, remain net profit interest owners. Amounts paid to these former officers under the remaining net profits arrangement amounted to $889, $915 and $727 in 2006, 2005 and 2004, respectively. In addition, Michael E. Madden, former Vice President of Reserves, was granted an overriding royalty interest in some of our properties by an independent third party. At the time he was granted this interest, he was serving Stone as an engineering consultant. The amounts paid to Michael E. Madden during 2006, 2005 and 2004 under the overriding royalty arrangement totaled $100, $156 and $101, respectively.

     The son of John P. Laborde, one of our directors, has an interest in several marine service companies, which provided services to us during 2005 and 2004 in the amount of $1,876 and $1,534, respectively. John P. Laborde has no interest in these companies.

NOTE 13 — HEDGING ACTIVITIES:

     We enter into hedging transactions to secure a commodity price for a portion of future production that is acceptable at the time of the transaction. The primary objective of these activities is to reduce our exposure to the risk of declining oil and natural gas prices during the term of the hedge. These hedges are designated as cash flow hedges upon entering into the contract. We do not enter into hedging transactions for trading purposes.

     Under Statement of Financial Accounting Standards (“SFAS”) No. 133, 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, to the extent the hedge is considered effective. Additionally, monthly settlements of effective hedges are reflected in revenue from oil and gas production. Instruments not qualifying for hedge accounting are recorded in the balance sheet at fair value and changes in fair value are recognized in earnings. Monthly settlements of ineffective hedges are recognized in earnings through derivative expense (income) and are not reflected as revenue from oil and natural gas production.

     Stone has entered into zero-premium collars with various counterparties for a portion of our expected 2007 and 2008 oil and 2007 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 oil collar settlements are based upon an average of the NYMEX closing price for West Texas Intermediate (“WTI”) during the entire calendar month. The 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. Our outstanding collars are with Bank of America, N.A., BNP Paribas and JP Morgan. During the year ended December 31, 2006, 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.

     During 2005 we utilized oil and gas collar contracts in the Gulf Coast Basin and fixed-price swaps to hedge a portion of our future gas production from our Rocky Mountain Region properties. Our swap contracts were with Bank of America and were based upon Inside FERC published prices for natural gas deliveries at Kern River. 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. The last of these contracts terminated on December 31, 2005. One of our collar contracts for September, October and November 2005 became ineffective when curtailments of our oil production resulting from Hurricanes Katrina and Rita resulted in production levels less than hedged amounts.

     During 2004, a portion or our oil and natural gas production from the Gulf Coast Basin was hedged with put contracts. Put contracts are purchased at a rate per unit of hedged production that fluctuates with the commodity futures market. The historical cost of the put contracts represents our maximum cash exposure. We are not obligated to make any further payments under the put contracts regardless of future commodity price fluctuations. Under put contracts, monthly payments are made to us if NYMEX prices fall below the agreed upon floor price, while allowing us to fully participate in commodity prices above that floor.

     During the year ended December 31, 2006, we realized a net increase in oil revenue and natural gas revenue related to our effective zero-premium collars of $89 and $36,953, respectively. We realized a net decrease of $31,231 in natural gas revenue related to our effective swaps and a net decrease of $10,936 in oil revenue related to our effective zero-premium collars for the year ended December 31, 2005. During the year ended December 31, 2004, we realized a net decrease in natural gas revenue related to our put contracts of $10,122.

     At December 31, 2006, we had accumulated other comprehensive income of $8,849, net of tax, which related to our 2007 and 2008 collar contracts. We believe this amount approximates the estimated amount to be reclassified into earnings in the next two years.

F-20

NOTE 13 — HEDGING ACTIVITIES: (Continued)

     Derivative expense (income) for the years ended December 31, 2006, 2005 and 2004 consisted of the following:

	Year Ended December 31,
	2006			2005		2004
Cost of put contracts settled	$	—		$	—	$	4,099
Cash settlement on the ineffective portion of derivatives		(2,311	)		3,388		—
Changes in fair market value of ineffective portion of derivatives		(377	)		—		—
Total derivative expense (income)		($2,688	)	$	3,388	$	4,099

     The following table shows our hedging positions as of February 14, 2007:

	Zero-Premium Collars
	Natural Gas							Oil
	Daily							Daily
	Volume			Floor		Ceiling		Volume		Floor		Ceiling
	(MMBtus/d)			Price		Price		(Bbls/d)		Price		Price
2007		20,000		$	7.50	$	10.40		3,000	$	60.00	$	78.35
2007		60,000	*		7.00		9.40		3,000		60.00		93.05
2008		—			—		—		3,000		60.00		90.20

* March — December (executed in early 2007)

NOTE 14 — COMMITMENTS AND CONTINGENCIES:

     We lease office facilities in New Orleans, Louisiana, Houston, Texas and Denver, Colorado under the terms of long-term, non-cancelable leases expiring on various dates through 2010. We also lease automobiles under the terms of non-cancelable leases expiring at various dates through 2007. We also lease certain equipment on our oil and gas properties typically on a month-to-month basis. The minimum net annual commitments under all leases, subleases and contracts noted above at December 31, 2006 were as follows:

2007	$	586
2008		476
2009		271
2010		271

     Payments related to our lease obligations for the years ended December 31, 2006, 2005 and 2004 were approximately $690, $876 and $1,122 respectively. We subleased office space to third parties, and for the years ended 2005 and 2004, we recorded related receipts of $86 and $832, respectively.

     We are contingently liable to surety insurance companies in the aggregate amount of $74,075 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. 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.

     We are also named as a defendant in certain lawsuits and are a party to certain regulatory proceedings arising in the ordinary course of business. We do not expect these matters, individually or in the aggregate, will have a material adverse effect on our financial condition.

     OPA imposes ongoing requirements on a responsible party, including the preparation of oil spill response plans and proof of financial responsibility to cover environmental cleanup and restoration costs that could be incurred in connection with an oil spill. Under OPA and a final rule adopted by the MMS in August 1998, responsible parties of covered offshore facilities that have a worst case oil spill of more than 1,000 barrels must demonstrate financial responsibility in amounts ranging from at least $10,000 in specified state waters to at least $35,000 in OCS waters, with higher amounts of up to $150,000 in certain limited circumstances where the MMS believes such a level is justified by the risks posed by the operations, or if the worst case oil-spill discharge volume possible at the facility may exceed the applicable threshold volumes specified under the MMS’s final rule. We do not anticipate that we will experience any difficulty in continuing to satisfy the MMS’s requirements for demonstrating financial responsibility under OPA and the MMS’s regulations.

F-21

NOTE 14 — COMMITMENTS AND CONTINGENCIES: (Continued)

     In connection with our exploration efforts, specifically in the deep water of the Gulf of Mexico, we have committed to acquire seismic data from certain providers on multiple offshore blocks over the next two years. As of December 31, 2006, our seismic data purchase commitments totaled $30,269 to be incurred over the next two years.

     We are among the defendants included in a lawsuit filed in 2004 by the State of Louisiana and the Iberia Parish School Board in Case Number 101934, Iberia Parish, Louisiana, alleging contamination and damage and seeking an undisclosed monetary sum as compensation for said damages to portions of Section 16, Township 12 South, Range 11 East in the Bayou Pigeon Field as a result of past oil and gas exploration and production activities. The Company believes it has been named as a defendant in error and intends to vigorously defend this matter.

     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, plus accrued interest of $352 (calculated through December 15, 2004), for the franchise 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, plus accrued interest of $159 (calculated through December 15, 2004), for the franchise years 1999, 2000 and 2001. Further, on December 29, 2005, the LDR filed another petition in the 15^th Judicial District Court claiming additional franchise taxes due for the taxable years ended December 31, 2002 and 2003 in the amount of $2,605 plus accrued interest calculated through December 15, 2005 in the amount of $1,194. 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. Stone has not yet been given any indication that the LDR plans to review franchise taxes for the franchise tax years 2004 and 2005.

     In 2005 Stone received notice that the staff of the SEC (the “Staff”) was conducting an informal inquiry into the revision of Stone’s proved reserves and the financial statement restatement. The Staff has also informed Stone that it is likely to obtain a formal order of investigation with its inquiry. In addition, Stone has received an inquiry from the Philadelphia Stock Exchange investigating matters including trading prior to Stone’s October 6, 2005 announcement. Stone is cooperating fully with both inquiries.

     On or around November 30, 2005, George Porch filed a putative class action in the United States District Court for the Western District of Louisiana (the “Federal Court”) against Stone, David Welch, Kenneth Beer, D. Peter Canty and James Prince purporting to allege violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. Three similar complaints were filed soon thereafter. All complaints had asserted a putative class period commencing on June 17, 2005 and ending on October 6, 2005. All complaints contended that, during the putative class period, defendants, among other things, misstated or failed to disclose (i) that Stone had materially overstated Stone’s financial results by overvaluing its oil reserves through improper and aggressive reserve methodologies; (ii) that the Company lacked adequate internal controls and was therefore unable to ascertain its true financial condition; and (iii) that as a result of the foregoing, the values of the Company’s proved reserves, assets and future net cash flows were materially overstated at all relevant times. On March 17, 2006, these purported class actions were consolidated, with El Paso Fireman & Policeman’s Pension Fund designated as Lead Plaintiff (“Securities Action”). Lead plaintiff filed a consolidated class action complaint on or about June 14, 2006. The consolidated complaint alleges claims similar to those described above and expands the putative class period to commence on May 2, 2001 and to end on March 10, 2006. On September 13, 2006, Stone and the individual defendants filed motions seeking dismissal of that action. The motion has since been fully briefed by the parties, but — as of this date — has not been decided by the Federal Court.

     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 naming Robert Farer, Priscilla Fisk and Joint Pension Fund, Local No. 164, I.B.E.W. as co-lead plaintiffs in the Federal Court derivative action and directed the lead plaintiffs to file a consolidated amended complaint within forty-five days. On April 22, 2006, the complaint in the State Court derivative action was amended to also assert claims on behalf of a purported class of shareholders of Stone. In addition to the above mentioned claims, the amended State Court derivative action complaint purported to allege breaches of fiduciary duty by the director defendants in connection with the then proposed merger transaction with Plains and seeks an order enjoining the director defendants from entering into the then proposed

F-22

NOTE 14 — COMMITMENTS AND CONTINGENCIES: (Continued)

transaction with Plains. On May 15, 2006, the first consolidated complaint in the Federal Court derivative action was filed; it contained a similar injunctive claim. On September 15, 2006, co-lead plaintiffs’ in the Federal Court derivative action further amended their complaint to seek an order enjoining Stone’s proposed merger with EPL based on substantially the same grounds previously asserted regarding the prior proposed transaction with Plains. On October 2, 2006, each of the defendants in the Federal Court derivative action filed or joined in motions seeking dismissal of all or part of that action. Those motions were denied without prejudice on November 30, 2006 when the Federal Court granted the co-lead plaintiffs leave to file a third amended complaint. Following the filing of the third amended complaint in the Federal Court derivative action, defendants filed motions seeking to have that action either dismissed or stayed until resolution of the pending motion to dismiss the Securities Action before the Federal Court. On December 21, 2006 the Federal Court stayed the Federal Court derivative action at least until resolution of the pending motion to dismiss the Securities Action after which time a hearing will be conducted by the Federal Court to determine the propriety of maintaining that stay.

     On or around August 28, 2006, ATS instituted an action (the “ATS Litigation”) in the Delaware Court of Chancery for New Castle County (the “Delaware Court”). The initial complaint in the ATS Litigation, among other things, challenged certain provisions of the EPL Merger Agreement pursuant to which EPL (i) paid the $43,500 Plains Termination Fee; and (ii) agreed, under certain contractually specified conditions, to pay Stone $25,600 in the event of a future termination of the Merger Agreement (the “EPL Termination Fee”). On or around September 12, 2006, a purported shareholder of EPL filed a purported class action in the Delaware Court (the “Farrington Action”). The initial Farrington Action complaint asserted claims similar to those in the ATS Litigation and sought, among other things, a damages recovery in the amount of the Plains Termination Fee.

     On or around September 7, 2006, EPL commenced an action against Stone in the Delaware Court (the “Declaratory Action”), in which EPL sought a declaratory judgment with respect to EPL’s rights and obligations under Section 6.2(e) of the Merger Agreement. On September 11, 2006, the Delaware Court expedited the Declaratory Action and consolidated with the Declaratory Action a portion of the ATS Litigation in which ATS likewise asserted claims respecting Section 6.2(e) of the Merger Agreement. By oral ruling on September 27, 2006, and subsequent written opinion dated October 11, 2006, the Delaware Court ruled, among other things, that Section 6.2(e) of the Merger Agreement did not limit the ability of EPL to explore and negotiate, in good faith, with respect to any Third Party Acquisition Proposals (as defined in the Merger Agreement), including the tender offer by ATS, Inc. for all of the outstanding shares of EPL stock at $23.00 per share (“ATS Offer”). The Delaware Court dismissed without prejudice the remainder of the claims raised by EPL in the Declaratory Action as not ripe for a judicial determination.

     On October 11, 2006, EPL and Stone entered into an agreement (the “Termination and Release Agreement”) pursuant to which they agreed, among other things, (i) to enter into a mutual termination of the Merger Agreement, (ii) to mutually release certain actual or potential claims or rights of action, (iii) to mutually seek a dismissal of the Declaratory Action, and (iv) that EPL would make a payment of $8,000 to Stone (the “$8 Million Payment”). EPL made the $8 Million Payment to Stone. On October 13, 2006, the Declaratory Action was dismissed by stipulation of the parties and order of the Delaware Court.

     On or around October 16, 2006, following the execution of the Termination and Release Agreement, plaintiffs in both the ATS Litigation and the Farrington Litigation sought (and were later granted leave by the Court) to file Second Amended Complaints that, among other things, added claims seeking a recovery in the amount of the $8 Million Payment. On October 26, 2006, ATS voluntarily dismissed the ATS Litigation without prejudice, while — as of this date — the Farrington Action remains pending. On November 2, 2006, Stone and EPL filed motions to dismiss the Farrington Action. The Delaware Court has yet to reach a determination as to the merits of the claims asserted in the Farrington Action with respect to the Plains Termination Fee or the $8 Million Payment.

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

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

F-23

NOTE 15 — EMPLOYEE BENEFIT PLANS:

     We have entered into deferred compensation and disability agreements with certain of our officers and former officers whereby we have purchased split-dollar life insurance policies to provide certain retirement and death benefits for certain of our officers and former officers and death benefits payable to us. The aggregate death benefit of the policies was $3,286 at December 31, 2006, of which $325 was payable to certain officers or former officers or their beneficiaries and $2,961 was payable to us. Total cash surrender value of the policies, net of related surrender charges at December 31, 2006, was approximately $1,309 and is recorded in other assets. Additionally, the benefits under the deferred compensation agreements vest after certain periods of employment, and at December 31, 2006, the liability for such vested benefits was approximately $889 and is recorded in other long-term liabilities.

     The following is a brief description of each incentive compensation plan applicable to our employees:

i.	The Annual Incentive Compensation Plan provided for an annual cash incentive bonus that ties incentives to the annual return on our common stock, to a comparison of the price performance of our common stock to the average quarterly returns on the shares of stock of a peer group of companies with which we compete and to the growth in our net earnings per share, net cash flows and net asset value. Incentive bonuses are awarded to participants based upon individual performance factors. This plan was terminated upon the approval and adoption of the Revised Annual Incentive Compensation Plan, discussed below.
	In February 2003 and February 2005, our board of directors approved and adopted the Revised Annual Incentive Compensation Plan. The revised plan provides for annual cash incentive bonuses that are tied to the achievement of certain strategic objectives as defined by our board of directors on an annual basis. Stone incurred expenses of $4,356, $1,252, and $2,318, net of amounts capitalized, for each of the years ended December 31, 2006, 2005 and 2004, respectively, related to incentive compensation bonuses to be paid under the revised plan. A substantial portion of the 2006 annual incentive bonuses were not earned by performance but were a result of an employee retention program put in place by the board of directors to address employee uncertainty that resulted from two terminated merger agreements in 2006.
ii.	The company’s 2004 Amended and Restated Stock Incentive Plan (the “Plan”) provides for the granting of incentive stock options, restricted stock awards, bonus stock awards, or any combination as is best suited to the circumstances of the particular employee or nonemployee director. The Plan provides for 4,225,000 shares of common stock to be reserved for issuance pursuant to this plan. Under the Plan, we may grant both incentive stock options qualifying under Section 422 of the Internal Revenue Code and options that are not qualified as incentive stock options to all employees and directors. All such options must have an exercise price of not less than the fair market value of the common stock on the date of grant and may not be re-priced without stockholder approval. Stock options to all employees vest ratably over a five-year service-vesting period and expire ten years subsequent to award. Stock options issued to non-employee directors vest ratably over a three-year service-vesting period and expire ten years subsequent to award. In addition, the Plan provides that shares available under the Plan may be granted as restricted stock. Restricted stock grants vest in two or more years at the discretion of the Compensation Committee of the board of directors. At December 31, 2006, we had approximately 727,291 additional shares available for issuance pursuant to the Plan.
iii.	The Stone Energy 401(k) Profit Sharing Plan provides eligible employees with the option to defer receipt of a portion of their compensation and we may, at our discretion, match a portion or all of the employee’s deferral. The amounts held under the plan are invested in various investment funds maintained by a third party in accordance with the directions of each employee. An employee is 20% vested in matching contributions (if any) for each year of service and is fully vested upon five years of service. For the years ended December 31, 2006, 2005 and 2004, Stone contributed $964, $974 and $850, respectively, to the plan.
iv.	The Stone Energy Corporation Deferred Compensation Plan provides eligible executives with the option to defer up to 100% of their compensation for a calendar year and we may, at our discretion, match a portion or all of the participant’s deferral based upon a percentage determined by the board of directors. To date there have been no matching contributions made by Stone. The amounts held under the plan are invested in various investment funds maintained by a third party in accordance with the direction of each participant. At December 31, 2006 and 2005, plan assets of $2,153 and $901, respectively, were included in other assets. An equal amount of plan liabilities were included in other long-term liabilities.

F-24

NOTE 15 — EMPLOYEE BENEFIT PLANS: (Continued)

v.

On November 16, 2006, our board of directors approved the Stone Energy Corporation Executive Change of Control and Severance Plan (“Severance Plan”), effective as of November 16, 2006. The Plan will provide the company’s executives that are terminated in the event of a change of control and upon certain other terminations of employment with change of control and severance benefits as defined in the Severance Plan. The Severance Plan replaces in full the company’s present Executive Severance Policy. The Severance Plan covers all officers, other than those covered by the company’s Executive Change of Control Severance Policy (currently only the Chief Executive Officer and Chief Financial Officer). Severance is triggered by a termination of employment by the company for the “convenience of the company”, as determined by the compensation committee of the board, whether or not a change of control has occurred. On and during the 12 month period following a change of control, a termination of the executive other than for cause or a resignation for “good reason” is deemed to be for the convenience of the company. Executives who are terminated within the scope of the Severance Plan will be entitled to certain payments and benefits including the following: a lump sum equal to his annual pay (or 2.99 times his annual pay if the termination is on or after a change of control), a pro-rated portion of the projected bonus, if any, for the year of termination or change of control, continued health plan coverage for six months and outplacement services. If the payments would be “excess parachute payments,” they will be reduced as necessary to avoid the 20% excise tax under Section 4999 of the Internal Revenue Code (the “Code”) but only if the executive is in a better net after-tax position after such reduction. Also, if a payment would be to a “key employee” for purposes of Section 409A of the Code, payment will be delayed until six months after his termination if required to comply with Section 409A. Benefits paid upon a change of control, without regard to whether there is a termination of employment, include the following: lapse of restrictions on restricted stock, accelerated vesting and cash-out of all in-the-money stock options, a 401(k) plan employer matching contribution at the rate of 50%, and a pro-rated portion of the projected bonus, if any, for the year of change of control. The Severance Plan will remain in effect through December 31, 2007 and may be extended from year to year by resolutions of the board. However, if a change of control occurs during a term, the term is automatically extended for 12 months from that change of control.

On November 16, 2006, our board of directors approved the Stone Energy Corporation Employee Change of Control Severance Plan (the “Employee Severance Plan”), effective as of November 16, 2006. The Employee Severance Plan covers all full-time employees other than officers. Severance is triggered by an involuntary termination of employment on and during the 6 month period following a change of control, including a resignation by the employee relating to a change in duties. Employees who are terminated within the scope of the Employee Severance Plan will be entitled to certain payments and benefits including the following: a lump sum equal to (1) his weekly pay times his full years of service, plus (2) one week’s pay for each full $10,000 of annual pay, but the sum of (1) and (2) cannot be less than 12 weeks of pay or greater than 52 weeks of pay; continued health plan coverage for six months; and a pro-rated portion of the employee’s targeted bonus for the year. Benefits paid upon a change of control, without regard to whether there is a termination of employment, include the following: lapse of restrictions on restricted stock, accelerated vesting and cash-out of all in-the-money stock options, a 401(k) plan employer matching contribution at the rate of 50%, and a lump sum cash payment equal to the product of (i) the number of “restricted shares” of company stock that the employee would have received under the company’s stock plan but did not receive for the time-vested portion of his long-term stock incentive award, if any, for the calendar year in which the change of control occurs times (ii) the price per share of the company’s common stock utilized in effecting the change of control, provided that such amount shall be prorated by multiplying such amount by the number of full months that have elapsed from January 1 of that calendar year to the effective date of the change of control and then dividing the result by twelve (12). The Employee Severance Plan will remain in effect through December 31, 2007 and may be extended from year to year by resolutions of the board. However, if a change of control occurs during a term, the term is automatically extended for 6 months from that change of control.

NOTE 16 — DIVESTITURE PROGRAM:

     In December 2006, we announced that our Board of Directors had approved and endorsed a strategic plan to re-focus on our Gulf of Mexico conventional shelf properties. As part of this strategy, we expect to divest selected properties in the Rocky Mountain Region and the Gulf Coast Basin in 2007. We anticipate that the proceeds from the planned asset sales would be used to materially reduce our debt. We expect this divestiture to be substantially completed in the second quarter of 2007.

F-25

NOTE 17 — OIL AND GAS RESERVE INFORMATION — UNAUDITED:

     Our net proved oil and gas reserves at December 31, 2006 have been prepared in accordance with guidelines established by the SEC. Accordingly, the following reserve estimates are based upon existing economic and operating conditions at the respective dates.

     There are numerous uncertainties inherent in estimating quantities of proved reserves and in providing the future rates of production and timing of development expenditures. The following reserve data represents estimates only and should not be construed as being exact. In addition, the present values should not be construed as the market value of the oil and gas properties or the cost that would be incurred to obtain equivalent reserves.

     The following table sets forth an analysis of the estimated quantities of net proved and proved developed oil (including condensate) and natural gas reserves, all of which are located onshore and offshore the continental United States:

							Oil and
				Natural			Natural
	Oil in			Gas in			Gas in
	MBbls			MMcf			MMcfe
Estimated proved reserves as of December 31, 2003		44,508			380,280			647,326
Revisions of previous estimates		(1,625	)		(16,585	)		(26,335	)
Extensions, discoveries and other additions		3,830			66,501			89,481
Purchase of producing properties		1,819			44,976			55,890
Sale of reserves		(709	)		(5,726	)		(9,980	)
Production		(5,438	)		(55,544	)		(88,172	)
Estimated proved reserves as of December 31, 2004		42,385			413,902			668,210
Revisions of previous estimates		(4,745	)		(50,881	)		(79,349	)
Extensions, discoveries and other additions		6,534			34,492			73,696
Purchase of producing properties		2,173			704			13,743
Production		(4,838	)		(54,129	)		(83,158	)
Estimated proved reserves as of December 31, 2005		41,509			344,088			593,142
Revisions of previous estimates		(5,064	)		(43,241	)		(73,625	)
Extensions, discoveries and other additions		2,580			74,069			89,549
Purchase of producing properties		7,928			11,374			58,942
Production		(5,593	)		(43,508	)		(77,066	)
Estimated proved reserves as of December 31, 2006		41,360			342,782			590,942
Estimated proved developed reserves:
as of December 31, 2004		33,115			312,454			511,144
as of December 31, 2005		31,557			241,347			430,689
as of December 31, 2006		33,301			222,664			422,470

F-26

NOTE 17 — OIL AND GAS RESERVE INFORMATION — UNAUDITED: (Continued)

     The following tables present the standardized measure of future net cash flows related to estimated proved oil and gas reserves together with changes therein, as defined by the FASB, including a reduction for estimated plugging and abandonment costs that are also reflected as a liability on the balance sheet at December 31, 2006 in accordance with SFAS No. 143. You should not assume that the future net cash flows or the discounted future net cash flows, referred to in the table below, represent the fair value of our estimated oil and gas reserves. As required by the SEC, we determine estimated future net cash flows using period-end market prices for oil and gas without considering hedge contracts in place at the end of the period. The average 2006 year-end product prices for all of our properties were $56.90 per barrel of oil and $5.39 per Mcf of gas. Future production and development costs are based on current costs with no escalations. Estimated future cash flows net of future income taxes have been discounted to their present values based on a 10% annual discount rate.

	Standardized Measure
	Year Ended December 31,
	2006			2005			2004
Future cash inflows	$	4,199,788		$	5,766,726		$	4,457,716
Future production costs		(1,254,374	)		(1,293,950	)		(851,926	)
Future development costs		(966,627	)		(678,212	)		(522,210	)
Future income taxes		(279,867	)		(987,901	)		(744,604	)
Future net cash flows		1,698,920			2,806,663			2,338,976
10% annual discount		(450,090	)		(873,684	)		(726,517	)
Standardized measure of discounted future net cash flows	$	1,248,830		$	1,932,979		$	1,612,459

	Changes in Standardized Measure
	Year Ended December 31,
	2006			2005			2004
Standardized measure at beginning of year	$	1,932,979		$	1,612,459		$	1,464,076
Sales and transfers of oil and gas produced, net of production costs		(513,785	)		(508,397	)		(436,748	)
Changes in price, net of future production costs		(931,742	)		879,528			193,382
Extensions and discoveries, net of future production and development costs		120,314			269,742			267,760
Changes in estimated future development costs, net of development costs incurred during the period		(14,222	)		(22,537	)		19,796
Revisions of quantity estimates		(247,092	)		(402,974	)		(141,133	)
Accretion of discount		256,508			207,148			187,795
Net change in income taxes		454,881			(173,079	)		(45,072	)
Purchases of reserves in-place		217,701			44,940			232,450
Sales of reserves in-place		—			—			(19,558	)
Changes in production rates due to timing and other		(26,712	)		26,150			(110,289	)
Net increase in standardized measure		(684,149	)		320,521			148,383
Standardized measure at end of year	$	1,248,830		$	1,932,980		$	1,612,459

F-27

NOTE 18 – SUMMARIZED QUARTERLY FINANCIAL INFORMATION – UNAUDITED:

	Three Months Ended
	March 31,		June 30,			Sept. 30,		Dec. 31,
2006
Operating revenue	$	158,434	$	169,179		$	182,158	$	179,217
Income (loss ) from operations		42,018		45,140			29,099		(481,506)	*
Net income (loss)		24,008		($1,452	)		21,758		(298,536)	*
Earnings (loss) common per share	$	0.88		($0.05	)	$	0.79		($10.91	)
Earnings (loss) common per share assuming dilution		0.88		(0.05	)		0.79		(10.91	)
2005
Operating revenue	$	156,153	$	185,238		$	159,275	$	135,574
Income from operations		56,519		72,334			55,690		47,924
Net income		33,424		43,967			32,978		26,395
Earnings common per share	$	1.25	$	1.64		$	1.22	$	0.97
Earnings common per share assuming dilution		1.24		1.62			1.20		0.96

* Includes a ceiling test write-down of $510,013 before taxes, $330,488 after taxes.

F-28

GLOSSARY OF CERTAIN INDUSTRY TERMS

     The following is a description of the meanings of some of the oil and gas industry terms used in this Form 10-K. The definitions of proved developed reserves, proved reserves and proved undeveloped reserves have been abbreviated from the applicable definitions contained in Rule 4-10(a)(-4) of Regulation S-X. The entire definitions of those terms can be viewed on the website at http://www.sec.gov/divisions/corpfin/forms/regsx.htm#gas.

     Active property. An oil and gas property with existing production.

     BBtu. One billion Btus.

     Bcf. One billion cubic feet of gas.

     Bcfe. One billion cubic feet of gas equivalent. Determined using the ratio of one barrel of crude oil to six mcf of natural gas.

     Bbl. One stock tank barrel, or 42 U.S. gallons of liquid volume, used herein in reference to crude oil or other liquid hydrocarbons.

     Btu. British thermal unit, which is the heat required to raise the temperature of a one-pound mass of water from 58.5 to 59.5 degrees Fahrenheit.

     Development well. A well drilled within the proved area of an oil or gas reservoir to the depth of a stratigraphic horizon known to be productive.

     Exploratory well. A well drilled to find and produce oil or gas reserves not classified as proved, to find a new reservoir in a field previously found to be productive of oil or gas in another reservoir or to extend a known reservoir.

     Gross acreage or gross wells. The total acres or wells, as the case may be, in which a working interest is owned.

     LIBOR. Represents the London Inter-Bank Offering Rate of interest.

     Liquidity. The ability to obtain cash quickly either through the conversion of assets or the incurrence of liabilities.

     MBbls. One thousand barrels of crude oil or other liquid hydrocarbons.

     Mcf. One thousand cubic feet of gas.

     Mcfe. One thousand cubic feet of gas equivalent. Determined using the ratio of one barrel of crude oil to six mcf of natural gas.

     MMBbls. One million barrels of crude oil or other liquid hydrocarbons.

     MMBtu. One million Btus.

     MMcf. One million cubic feet of gas.

     MMcfe. One million cubic feet of gas equivalent. Determined using the ratio of one barrel of crude oil to six mcf of natural gas.

     MMcfe/d. One million cubic feet of gas equivalent per day.

     Make-Whole Amount. The greater of 104.125% of the principal amount of the 8-1/4% Notes (103.375% of the principal amount of the 6 3/4 % Notes)and the sum of the present values of the remaining scheduled payments of principal and interest discounted to the date of redemption on a semiannual basis at the applicable treasury rate plus 50 basis points.

     Net acres or net wells. The sum of the fractional working interests owned in gross acres or gross wells.

G-1

     GLOSSARY OF CERTAIN INDUSTRY TERMS: (Continued)

     Net profits interest. An interest in an oil and gas property entitling the owner to a share of oil or gas production subject to production costs.

     Overriding royalty interest. An interest in an oil and gas property entitling the owner to a share of oil or gas production free of production and capital costs.

     Pari Passu. The term is Latin and translates to “without partiality.” Commonly refers to two securities or obligations having equal rights to payment.

     Primary term lease. An oil and gas property with no existing production, in which Stone has a specific time frame to establish production without losing the rights to explore the property.

     Production payment. An obligation of the purchaser of a property to pay a specified portion of future gross revenues, less related production taxes and transportation costs, to the seller of the property.

     Productive well. A well that is found to be capable of producing hydrocarbons in sufficient quantities that proceeds from the sale of such production exceeds production expenses and taxes.

     Proved developed reserves. Proved reserves that can be expected to be recovered from existing wells with existing equipment and operating methods.

     Proved reserves. The estimated quantities of crude oil, natural gas and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions.

     Proved undeveloped reserves. Proved reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for recompletion.

     Standardized measure of discounted future net cash flows. The standardized measure represents value-based information about an enterprise’s proved oil and gas reserves based on estimates of future cash flows, including income taxes, from production of proved reserves assuming continuation of year-end economic and operating conditions.

     Undeveloped acreage. Lease acreage on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of oil and gas regardless whether such acreage contains proved reserves.

     Volumetric production payment. An obligation of the purchaser of a property to deliver a specific volume of production, free and clear of all costs, to the seller of the property.

     Working interest. An operating interest that gives the owner the right to drill, produce and conduct operating activities on the property and to receive a share of production.

G-2

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	—	Restated Bylaws of the Registrant.
4.1	—	Rights Agreement, with exhibits A, B and C thereto, dated as of October 15, 1998, between Stone Energy Corporation and ChaseMellon Shareholder Services, L.L.C., as Rights Agent (incorporated by reference to Exhibit 4.1 to the Registrant’s Registration Statement on Form 8-A (File No. 001-12074)).
4.2	—	Amendment No. 1, dated as of October 28, 2000, to Rights Agreement dated as of October 15, 1998, between Stone Energy Corporation and ChaseMellon Shareholder Services, L.L.C., as Rights Agent (incorporated by reference to Exhibit 4.4 to the Registrant’s Registration Statement on Form S-4 (Registration No. 333-51968)).
4.3	—	Indenture between Stone Energy Corporation and JPMorgan Chase Bank dated December 10, 2001 (incorporated by reference to Exhibit 4.4 to the Registrant’s Registration Statement on Form S-4 (Registration No. 333-81380)).
4.4	—	Indenture between Stone Energy Corporation and JPMorgan Chase Bank, National Association, as trustee, dated December 15, 2004 (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed on December 15, 2004.)
4.5	—	Indenture between Stone Energy Corporation and JPMorgan Chase Bank, National Association, as trustee, dated June 28, 2006 (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed on June 28, 2006.)
4.6	—	Registration Rights Agreement between Stone Energy Corporation and the Initial Purchasers of the Floating Rate Senior Notes due 2010 named therein, dated as of June 28, 2006 (incorporated by reference to Exhibit 4.2 to the registrant’s Current Report on Form 8-K dated June 28, 2006 (File No. 001-12074)).
†10.1	—	Deferred Compensation and Disability Agreements between TSPC and D. Peter Canty dated July 16, 1981, and between TSPC and James H. Prince dated August 23, 1981 and September 20, 1981, respectively (incorporated by reference to Exhibit 10.8 to the Registrant’s Registration Statement on Form S-1 (Registration No. 33-62362)).
†10.2	—	Conveyances of Net Profits Interests in certain properties to D. Peter Canty and James H. Prince (incorporated by reference to Exhibit 10.9 to the Registrant’s Registration Statement on Form S-1 (Registration No. 33-62362)).
†10.3	—	Deferred Compensation and Disability Agreement between TSPC and E. J. Louviere dated July 16, 1981 (incorporated by reference to Exhibit 10.10 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1995 (File No. 001-12074)).
†10.4	—	Stone Energy Corporation Annual Incentive Compensation Plan (incorporated by reference to Exhibit 10.14 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1993 (File No. 001-12074)).

Exhibit
Number		Description
†10.5	—	Stone Energy Corporation Amendment to the Annual Incentive Compensation Plan dated January 15, 1997 (incorporated by reference to Exhibit 10.9 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2000 (File No. 001-12074)).
†10.6	—	Stone Energy Corporation Revised Annual Incentive Compensation Plan (incorporated by reference to Exhibit 10.10 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2002 (File No. 001-12074)).
†10.7	—	Stone Energy Corporation 2001 Amended and Restated Stock Option Plan (incorporated by reference to Exhibit 4.1 to the Registrant’s Registration Statement on Form S-8 (Registration No. 333-107440)).
10.8	—	Credit Agreement between the Registrant, the financial institutions named therein and Bank of America, N.A., as administrative agent, dated April 30, 2004. (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q, filed August 9, 2004 (File No. 001-12074)).
10.9	—	Amendment No. 1 to the Credit Agreement between the Registrant, the financial institutions named therein and Bank of America, N.A., as administrative agent, dated December 14, 2004 (incorporated by reference to Exhibit 10.9 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2004 (File No. 001-12074)).
†10.10	—	Stone Energy Corporation 2004 Amended and Restated Stock Incentive Plan (incorporated by reference to the Registrant’s Registration Statement on Form S-8 (Registration No. 333-107440)).
†10.11	—	Stone Energy Corporation Revised (2005) Annual Incentive Compensation Plan (incorporated by reference to Exhibit 10.11 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2004 (File No. 001-12074)).
10.12	—	Amendment No. 2 to the Credit Agreement between the Registrant, the financial institutions named therein and Bank of America, N.A., as administrative agent, dated March 28, 2006 (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the period ending March 31, 2006 (File No. 001-12074)).
10.13	—	Amendment No. 3 and Waiver dated as of June 16, 2006 among Stone Energy Corporation, the banks party to the Credit Agreement and Bank of America, N.A., as Agent for the Banks, (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated June 16, 2006 (File No. 001-12074)).
*10.14	—	Amendment No. 4 and Waiver to the Credit Agreement dated as of July 12, 2006 among Stone Energy Corporation, the financial institutions party to the Credit Agreement and Bank of America, N.A., as Agent for the Banks.
*10.15	—	Amendment No. 5 to the Credit Agreement dated as of December 31, 2006 among Stone Energy Corporation, the financial institutions party to the Credit Agreement and Bank of America, N.A. as Agent for the Banks.
10.16	—	Letter Agreement dated May 19, 2005 between Stone Energy Corporation and Kenneth H. Beer (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed May 24, 2005 (File No. 001-12074)).
10.17	—	Employment Agreement dated January 12, 2006 between Stone Energy Corporation and David H. Welch (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed January 18, 2006 (File No. 001-12074)).
10.18	—	Stone Energy Corporation Executive Severance Policy dated August 18, 2005 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed August 23, 2005 (File No. 001-12074)).
10.19	—	Stone Energy Corporation Executive Change in Control Severance Policy dated August 18, 2005 (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K, filed August 23, 2005 (File No. 001-12074)).

Exhibit
Number		Description
10.20	—	Stone Energy Corporation Executive Change of Control and Severance Plan dated November 16, 2006 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed November 20, 2006 (File No. 001-12074)).
10.21	—	Stone Energy Corporation Employee Change of Control Severance Plan dated November 16, 2006 (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K, filed November 20, 2006 (File No. 001-12074)).
†10.22	—	Stone Energy Corporation Deferred Compensation Plan (incorporated by reference to Exhibit 4.5 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2004 (File No. 001-12074)).
†10.23	—	Adoption Agreement between Fidelity Management Trust Company and Stone Energy Corporation for the Stone Energy Corporation Deferred Compensation Plan dated December 1, 2004 (incorporated by reference to Exhibit 4.6 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2004 (File No. 001-12074)).
16.1	—	Letter of Arthur Andersen LLP, dated June 26, 2002, regarding change in certifying accountant (incorporated by reference to Exhibit 16.1 to the Registrant’s Form 8-K, filed June 27, 2002 (File No. 001-12074)).
18.1	—	Letter of Ernst & Young LLP, dated May 13, 2003, regarding change in accounting principles (incorporated by reference to Exhibit 18.1 to the Registrant’s Quarterly Report on Form 10-Q, for the period ended March 31, 2003 (File No. 001-12074)).
*21.1	—	Subsidiaries of the Registrant.
*23.1	—	Consent of Independent Registered Public Accounting Firm.
*23.2	—	Consent of Netherland, Sewell & Associates, Inc.
*23.3	—	Consent of Ryder Scott Company, L.P.
*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.
†	Identifies management contracts and compensatory plans or arrangements.
#	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.

EX-3.3

Exhibit 3.3

RESTATED BYLAWS

OF

STONE ENERGY CORPORATION

A Delaware Corporation

As of February 4, 2004

TABLE OF CONTENTS

ARTICLE I OFFICES	1
Section 1. Registered Office	1
Section 2. Other Offices	1
ARTICLE II STOCKHOLDERS	1
Section 1. Place of Meetings	1
Section 2. Quorum; Required Vote for Stockholder Action; Withdrawal During Meeting; Adjournment	1
Section 3. Annual Meetings	2
Section 4. Special Meetings	2
Section 5. Record Date	2
Section 6. Notice of Meetings	3
Section 7. List of Stockholders	4
Section 8. Proxies	4
Section 9. Voting; Elections; Inspectors	4
Section 10. Conduct of Meetings	5
Section 11. Treasury Stock	6
Section 12. Action Without Meeting	6
Section 13. Business to be Brought Before the Annual Meeting	6
ARTICLE III BOARD OF DIRECTORS	7
Section 1. Power; Number; Term of Office	7
Section 2. Classification of Directors	8
Section 3. Quorum; Required Vote for Director Action	8
Section 4. Place of Meetings; Order of Business	8
Section 5. First Meeting	8
Section 6. Regular Meetings	8
Section 7. Special Meetings	8
Section 8. Removal	9
Section 9. Vacancies; Increases in the Number of Directors	9
Section 10. Compensation	9
Section 11. Action Without a Meeting; Telephone Conference Meeting	9
Section 12. Approval or Ratification of Acts or Contracts by Stockholders	10
Section 13. Nominations for Election as a Director	10
ARTICLE IV COMMITTEES	11
Section 1. Designation; Powers	11
Section 2. Procedure; Meetings; Quorum	12
Section 3. Substitution of Members	12

i 

ARTICLE V OFFICERS	12
Section 1. Number, Titles and Term of Office	12
Section 2. Compensation	12
Section 3. Removal	12
Section 4. Vacancies	12
Section 5. Powers and Duties of the Chief Executive Officer	12
Section 6. Powers and Duties of the Chairman of the Board	13
Section 7. Powers and Duties of the President	13
Section 8. Vice Presidents	13
Section 9. Secretary	13
Section 10. Assistant Secretaries	14
Section 11. Action with Respect to Securities of Other Corporations	14
ARTICLE VI INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS	14
Section 1. Right to Indemnification	14
Section 2. Advance Payment	15
Section 3. Indemnification of Employees and Agents	15
Section 4. Appearance as a Witness	15
Section 5. Right of Claimant to Bring Suit	15
Section 6. Nonexclusivity of Rights	16
Section 7. Insurance	16
Section 8. Savings Clause	16
Section 9. Definitions	16
ARTICLE VII CAPITAL STOCK	16
Section 1. Certificates of Stock	16
Section 2. Transfer of Shares	17
Section 3. Ownership of Shares	17
Section 4. Regulations Regarding Certificates	17
Section 5. Lost, Stolen	17
ARTICLE VIII MISCELLANEOUS PROVISIONS	18
Section 1. Fiscal Year	18
Section 2. Corporate Seal	18
Section 3. Notice and Waiver of Notice	18
Section 4. Resignations	18
Section 5. Facsimile Signatures	18
Section 6. Reliance upon Books, Reports and Records	18
ARTICLE IX AMENDMENTS	19

ii 

RESTATED BYLAWS

OF

STONE ENERGY CORPORATION

A DELAWARE CORPORATION

ARTICLE I

OFFICES

     Section 1. Registered Office. The registered office of the Corporation required by the General Corporation Law of the State of Delaware to be maintained in the State of Delaware shall be the registered office named in the original Certificate of Incorporation of the Corporation, or such other office as may be designated from time to time by the Board of Directors in the manner provided by law. If the Corporation maintains a principal office within the State of Delaware, the registered office need not be identical to such principal office of the Corporation.

     Section 2. Other Offices. The Corporation may have other offices at such places both within and without the State of Delaware as the Board of Directors may from time to time determine or as the business of the Corporation may require.

ARTICLE II

STOCKHOLDERS

     Section 1. Place of Meetings. All meetings of the stockholders shall be held at the principal office of the Corporation, or at such other place either within or without the State of Delaware as shall be specified or fixed in the notices or waivers of notice thereof.

     Section 2. Quorum; Required Vote for Stockholder Action; Withdrawal During Meeting; Adjournment. Unless otherwise required by law, the Certificate of Incorporation or these bylaws, the holders of a majority of the stock issued and outstanding and entitled to vote at any meeting of stockholders, present in person or represented by proxy, shall constitute a quorum at any such meeting of stockholders. The affirmative vote of the holders of a majority of such stock so present or represented at any such meeting at which a quorum is present and entitled to vote on the subject matter being considered shall constitute the act of the stockholders. Where there is a required quorum present when any duly organized meeting convenes, the stockholders present may continue to transact business until adjournment, notwithstanding the subsequent withdrawal of sufficient stockholders or proxies to reduce the total number of voting shares below the number of shares required for a quorum.

     Notwithstanding other provisions of the Certificate of Incorporation or these bylaws, the chairman of the meeting of stockholders or the holders of a majority of the issued and outstanding stock entitled to vote at such meeting, present in person or represented by proxy, at any meeting of stockholders, whether or not a quorum is present, shall have the power to adjourn such meeting from time to time, without any notice other than announcement at the meeting of the time and place of the holding of the adjourned meeting. If the adjournment is for more than 30 days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at such meeting. At such adjourned meeting at which a quorum shall be present or represented by proxy, any business may be transacted which might have been transacted at the meeting as originally called. If a quorum is present at the original duly organized meeting of stockholders, it is also present at an adjourned session of such meeting.

     Section 3. Annual Meetings. An annual meeting of the stockholders, for the election of directors to succeed those whose terms expire and for the transaction of such other business as may properly be considered at the meeting, shall be held at such place, within or without the State of Delaware, on such date and at such time as the Board of Directors shall fix and set forth in the notice of the meeting. If the Board of Directors has not fixed a place for the holding of the annual meeting of stockholders in accordance with this Article II, Section 3, such annual meeting shall be held at the principal place of business of the Corporation. No business may be conducted at the annual meeting of stockholders except in accordance with the procedures set forth in Section 13 of this Article II

     Section 4. Special Meetings. Unless otherwise provided in the Certificate of Incorporation, special meetings of the stockholders for any proper purpose or purposes may be called at any time by the Chairman of the Board (if any), by the President or by a majority of the Board of Directors, or by a majority of the executive committee (if any), and special meetings may not be called by any other person or persons. Only business within the proper purpose or purposes described in the notice required by these bylaws may be conducted at a special meeting of the stockholders.

     If not otherwise stated in or fixed in accordance with the remaining provisions hereof, the record date for determining stockholders entitled to call a special meeting shall be the date any stockholder first signs the notice of that meeting. Only business within the proper purpose or purposes described in the notice (or waiver thereof) required by these bylaws may be conducted at a special meeting of the stockholders.

     Section 5. Record Date. For the purpose of determining stockholders entitled to notice of or to vote at any meeting of stockholders, or any adjournment thereof, or entitled to consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in connection with any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a date as the record date for any such determination of stockholders entitled to notice of or to vote at a meeting, which date shall not be more than 60 nor less than 10 days prior to the date of such meeting.

2

     If the Board of Directors does not fix a record date for any meeting of the stockholders, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be the close of business on the day next preceding the day on which notice of such meeting is given, or, if notice is waived in accordance with Article VIII, Section 3 of these bylaws, the close of business on the day next preceding the day on which the meeting is held.

     If, in accordance with Article II, Section 12 hereof, corporate action without a meeting of stockholders is to be taken, the Board of Directors may fix a record date for determining stockholders entitled to consent in writing to such corporate action, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall not be more than 10 days subsequent to the date upon which the resolution fixing the record date is adopted by the Board of Directors.

     If no record date has been fixed by the Board of Directors, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is required by law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the Corporation by delivery to its registered office, its principal place of business, or to an officer or to agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the Corporation’s registered office shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the Board of Directors and prior action by the Board of Directors is required by law, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be the close of business on the day on which the Board of Directors adopts the resolution taking such prior action.

     In order that the Corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights, or the stockholders entitled to exercise any rights in connection with any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall not be more than 60 days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be the close of business on the day on which the Board of Directors adopts the resolution relating thereto.

     A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting.

     Section 6. Notice of Meetings. Written notice stating the place, day and hour of all meetings, and, in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered by or at the direction of the President, the Secretary or the other person(s) calling the meeting not less than 10 nor more than 60 days before the date of the meeting to each stockholder entitled to vote at such meeting. Such notice may be delivered either personally or by mail. If mailed, notice shall be deemed to have been given when deposited in the United States mail, postage prepaid, directed to the stockholder at his address as it appears on the records of the Corporation. An affidavit of the Secretary, an Assistant Secretary or the

3

transfer agent of the Corporation that the notice has been given shall, in the absence of fraud, be prima fade evidence of the facts stated therein.

     Section 7. List of Stockholders. The officer or agent having charge of the share transfer records of the Corporation shall prepare and make, at least 10 days prior to each meeting of stockholders, a complete list of the stockholders entitled to vote at such meeting or any adjournment thereof, arranged in alphabetical order, with the address of and the number of shares held by each, which list, for a period of 10 days prior to such meeting, shall be kept on file at the registered office or principal place of business of the Corporation and shall be subject to inspection by any stockholder at any time during usual business hours. Such list shall also be produced and kept open at the time and place of the meeting and shall be subject to inspection by any stockholder during the course of the meeting. The original share transfer records shall be prima facie evidence as to the identity of those stockholders entitled to examine such voting list or transfer records or to vote at any meeting of stockholders. Failure to comply with the requirements of this Article II, Section 7 shall not affect the validity of any action taken at such meeting.

     Section 8. Proxies. Each stockholder entitled to vote at a meeting of stockholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person or persons to act for him by proxy. Proxies for use at any meeting of stockholders shall be filed with the Secretary, or such other officer as the Board of Directors may from time to time determine by resolution, before or at the time of such meeting. All proxies shall be received and taken charge of and all ballots shall be received and canvassed by the secretary of the meeting who shall decide all questions with respect to the qualification of voters, the validity of the proxies, and the acceptance or rejection of votes, unless an inspector or inspectors shall have been appointed by the chairman of the meeting, in which event such inspector or inspectors shall decide all such questions.

     No proxy shall be valid after 3 years from the date of its execution, unless such proxy provides for a longer period. Each proxy shall be revocable unless expressly provided therein to be irrevocable and only as long as it is coupled with an interest sufficient in law to support an irrevocable power.

     If a proxy designates two or more persons to act as proxies, unless such instrument shall expressly provide to the contrary, a majority of such persons present at any meeting at which their powers thereunder are to be exercised shall have and may exercise all the powers of voting or consent thereby conferred, or if only one be present, then such powers may be exercised by that one; or, if an even number attend and a majority cannot agree on any particular issue, the Corporation shall not be required to recognize such proxy with respect to such issue, if such proxy does not specify how the shares that are the subject of such proxy are to be voted with respect to such issue.

     Section 9. Voting; Elections; Inspectors. Unless otherwise required by law or provided in the Certificate of Incorporation, each stockholder shall, on each matter submitted to a vote at a meeting of stockholders, have one vote for each share of capital stock entitled to vote thereon that is registered in his name on the record date for such meeting. Shares registered in the name of another corporation, domestic or foreign, may be voted by such officer, agent or

4

proxy as the bylaws (or comparable instrument) of such corporation may prescribe, or in the absence of such provision, as the Board of Directors (or comparable body) of such corporation may determine. Shares registered in the name of a deceased person may be voted by his executor or administrator, either in person or by proxy.

     All voting, except as otherwise required by law or the Certificate of Incorporation, may be by a voice vote; provided, however, that upon demand therefor by stockholders holding a majority of the issued and outstanding stock present in person or by proxy at any meeting of stockholders, a stock vote shall be taken. Every stock vote shall be taken by written ballot, and each ballot shall state the name of the stockholder or proxy voting and such other information as may be required under the procedure established for the meeting. All elections of directors shall be by stock vote, unless otherwise provided in the Certificate of Incorporation.

     At any meeting of stockholders at which a vote is to be taken by ballot, the chairman of the meeting shall appoint one or more inspectors, each of whom shall sign an oath or affirmation to faithfully to execute the duties of inspector with strict impartiality and according to the best of his ability. The inspectors shall receive the ballots, count the votes and make and sign a certificate of the result thereof. The chairman of the meeting may appoint any person to serve as inspector, except that no candidate for the office of director shall be appointed as an inspector.

     All elections shall be determined by a plurality of the votes cast and, except as otherwise required by law, the Certificate of Incorporation or these bylaws, all other matters shall be determined by a majority of the votes cast.

     Unless otherwise provided in the Certificate of Incorporation, cumulative voting for the election of directors shall be prohibited.

     Section 10. Conduct of Meetings. All meetings of the stockholders shall be presided over by the chairman of the meeting, who shall be the Chairman of the Board (if any), or if he is not present, the President, or if neither the Chairman of the Board (if any) nor President is present, a chairman elected at the meeting. The Secretary of the Corporation, if present, shall act as secretary of such meetings, or if he is not present, an Assistant Secretary (if any) shall so act; if neither the Secretary nor an Assistant Secretary (if any) is present, then a secretary shall be appointed by the chairman of the meeting.

     The chairman of any meeting of stockholders shall determine the order of business and the procedure at the meeting, including such regulation of the manner of voting and the conduct of discussion, as seem to the chairman in order. Unless the chairman of the meeting shall otherwise determine, the order of business shall be as follows:

(a)	Calling of meeting to order.
(b)	Election of a chairman and appointment of a secretary, if necessary.
(c)	Presentation of proof of the due calling of the meeting.
(d)	Presentation and examination of proxies and determination of a quorum.

5

(e)	Reading and settlement of the minutes of the previous meeting.
(f)	Reports of officers and committees.
(g)	Election of directors, if an annual meeting, or special election if a meeting called for such purpose.
(h)	Unfinished business.
(i)	New business.
(j)	Adjournment.

     Section 11. Treasury Stock. Neither the Corporation nor any other person shall vote, directly or indirectly, shares of the Corporation’s own stock owned by the Corporation, shares of the Corporation’s own stock owned by another corporation the majority of the voting stock of which is owned or controlled by the Corporation, or shares of the Corporation’s own stock held by the Corporation in a fiduciary capacity and such shares shall not be counted for quorum purposes or in determining the number of outstanding shares.

     Section 12. Action Without Meeting. Unless otherwise provided in the Certificate of Incorporation, any action permitted or required by law, the Certificate of Incorporation or these bylaws to be taken at a meeting of stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken, shall be signed by all of the holders of the outstanding stock entitled to vote thereon and such consent shall be delivered to the Corporation’s registered office, its principal place of business, or to an officer or agent of the Corporation having custody of the book in which the proceedings of meetings of stockholders are recorded. Delivery made to a Corporation’s registered office shall be by hand or by certified or registered mail, return receipt requested. Every written consent shall bear the date of signature thereto and no written consent shall be effective to take the corporate action referred to therein unless, within 60 days of the first consent delivered to the Corporation in the manner required by this Article II, Section 12, written consents signed by a sufficient number of holders to take action are delivered to the Corporation.

     Section 13. Business to be Brought Before the Annual Meeting. To be properly brought before the annual meeting of stockholders, business must be either (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (b) otherwise brought before the meeting by or at the direction of the Board of Directors, or (c) otherwise properly brought before the meeting by a stockholder of the Corporation who is a stockholder of record at the time of giving of notice provided for in this Section 13, who shall be entitled to vote at such meeting and who complies with the notice procedures set forth in this Section 13. In addition to any other applicable requirements, for business to be brought before an annual meeting by a stockholder of the Corporation, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a stockholder’s notice must be delivered to or mailed and received at the principal executive offices of the Corporation not less than 120 days prior to the anniversary date of the proxy statement for the preceding annual meeting of stockholders of the Corporation. A stockholder’s notice to the Secretary shall set forth as to each matter (i) a brief description of the

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business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and address, as they appear on the Corporation’s books, of the stockholder proposing such business, (iii) the acquisition date, the class and the number of shares of voting stock of the Corporation which are owned beneficially by the stockholder, (iv) any material interest of the stockholder in such business, and (v) a representation that the stockholder intends to appear in person or by proxy at the meeting to bring the proposed business before the meeting.

     Notwithstanding anything in these Bylaws to the contrary, no business shall be conducted at the annual meeting except in accordance with the procedures set forth in this Section 13.

     The chairman of the annual meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of this Section 13, and if the chairman should so determine, the chairman shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted.

     Notwithstanding the foregoing provisions of this Section 13, a stockholder shall also comply with all applicable requirements of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder with respect to the matters set forth in this Section 13.

ARTICLE III

BOARD OF DIRECTORS

     Section 1. Power; Number; Term of Office. The powers of the Corporation shall be exercised by or under the authority of, and the business and affairs of the Corporation shall be managed by or under, the direction of the Board of Directors, and subject to the restrictions imposed by law or the Certificate of Incorporation, they may exercise all the powers of the Corporation.

     Unless otherwise provided in the Certificate of Incorporation, the number of directors that shall constitute the Board of Directors shall be determined from time to time by resolution of the Board of Directors (provided that no decrease in the number of directors that would have the effect of shortening the term of an incumbent director may be made by the Board of Directors). If the Board of Directors does not make such determination, the number of directors shall be the number set forth in the Certificate of Incorporation as the number of directors constituting the initial Board of Directors; provided, however, that in no event shall there be more than thirteen (13) directors in the aggregate. Each director shall hold office for the term for which he is elected and thereafter until his successor shall have been elected and qualified, or until his earlier death, resignation or removal.

     Unless otherwise provided in the Certificate of Incorporation, directors need not be stockholders or residents of the State of Delaware.

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     Section 2. Classification of Directors. Effective at the time of the annual meeting of stockholders in 1993, in lieu of electing the whole number of directors annually, the directors shall be divided into three classes, Class I, Class II and Class III, each class to be as nearly equal in number as possible, and the remainder of this Section 2 shall be effective. Each director shall serve for a term ending on the date of the third annual meeting of stockholders following the annual meeting at which such director was elected; provided, however, that each initial director in Class I shall hold office until the first annual meeting of stockholders after his election; each initial director in Class II shall hold office until the second annual meeting of stockholders after his election; and each initial director in Class III shall hold office until the third annual meeting of stockholders after his election. In the event of any increase or decrease in the authorized number of directors, (i) each director then serving as such shall nevertheless continue as a director of the class of which he is a member until the expiration of his current term or until his prior death, retirement, resignation or removal for cause in accordance with the provisions of these bylaws, and (ii) the newly created or eliminated directorships resulting from such increase or decrease shall be apportioned by the Board of Directors among the three classes of directors so as to maintain such classes as nearly equal in number as possible.

     Section 3. Quorum; Required Vote for Director Action. Unless otherwise required by law or in the Certificate of Incorporation or these bylaws, a majority of the total number of directors shall constitute a quorum for the transaction of business of the Board of Directors and the vote of a majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors.

     Section 4. Place of Meetings; Order of Business. The directors may hold their meetings and may have an office and keep the books of the Corporation, except as otherwise provided by law, in such place or places, within or without the State of Delaware, as the Board of Directors may from time to time determine by resolution. At all meetings of the Board of Directors, business shall be transacted in such order as shall from time to time be determined by the Chairman of the Board (if any), or in his absence by the President (if the President is a director) or by resolution of the Board of Directors.

     Section 5. First Meeting. Each newly elected Board of Directors may hold its first meeting for the transaction of business, if a quorum is present, immediately after and at the same place as the annual meeting of the stockholders. Notice of such meeting shall not be required. At the first meeting of the Board of Directors in each year at which a quorum shall be present, held next after the annual meeting of stockholders, the Board of Directors shall proceed to the election of the officers of the Corporation.

     Section 6. Regular Meetings. Regular meetings of the Board of Directors shall be held at such times and places as shall be designated from time to time by resolution of the Board of Directors. Notice of such regular meetings shall not be required.

     Section 7. Special Meetings. Special meetings of the Board of Directors may be called by the Chairman of the Board (if any), the President or, upon written request of any two directors, by the Secretary, in each case on at least 24 hours personal, written, telegraphic, cable or wireless notice to each director. Such notice, or any waiver thereof pursuant to Article VIII,

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Section 3 hereof, need not state the purpose or purposes of such meeting, except as may otherwise be required by law, the Certificate of Incorporation or these bylaws.

     Section 8. Removal. Any one or more directors or the entire Board of Directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors; provided that, unless the Certificate of Incorporation otherwise provides, if the Board of Directors is classified, the stockholders may effect such removal only for cause; and provided further that, if the Certificate of Incorporation expressly grants to stockholders the right to cumulate votes for the election of directors and if less than the entire board is to be removed, no director may be removed without cause if the votes cast against his removal would be sufficient to elect him if then cumulatively voted at an election of the entire Board of Directors or, if there be classes of directors, at an election of the class of directors of which such director is a part.

     Section 9. Vacancies; Increases in the Number of Directors. Unless otherwise provided in the Certificate of Incorporation or these bylaws, vacancies and newly created directorships resulting from any increase in the authorized number of directors elected by all of the stockholders having the right to vote as a single class may be filled only by the affirmative vote of a majority of the directors then in office, although less than a quorum, or by a sole remaining director. If the Certificate of Incorporation entitles the holders of any class or classes of stock or series thereof to elect one or more directors, vacancies and newly created directorships of such class or classes or series may be filled only by a majority of the directors elected by such class or classes or series thereof then in office, or by a sole remaining director so elected.

     If the directors of the Corporation are divided into classes, any directors elected to fill vacancies or newly created directorships shall hold office until the next election of the class for which such directors shall have been chosen, and until their successors shall be duly elected and qualified.

     Section 10. Compensation. Unless otherwise provided in the Certificate of Incorporation, the Board of Directors shall have the authority to fix the compensation, if any, of directors.

     Section 11. Action Without a Meeting; Telephone Conference Meeting. Unless otherwise provided in the Certificate of Incorporation, any action required or permitted to be taken at any meeting of the Board of Directors, or any committee designated by the Board of Directors, may be taken without a meeting if all members of the Board of Directors or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board of Directors or committee. Such consent shall have the same force and effect as a unanimous vote at a meeting, and may be stated as such in any document or instrument filed with the Secretary of State of Delaware.

     Unless otherwise restricted by the Certificate of Incorporation, subject to the requirement for notice of meetings, members of the Board of Directors, or members of any committee designated by the Board of Directors, may participate in a meeting of such Board of Directors or committee, as the case may be, by means of conference telephone or similar communications

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equipment, by means of which all persons participating in the meeting can hear each other, and participation in such a meeting shall constitute presence in person at such meeting, except where a person participates in the meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened.

     Section 12. Approval or Ratification of Acts or Contracts by Stockholders. The Board of Directors in its discretion may submit any act or contract for approval or ratification at any annual meeting of the stockholders, or at any special meeting of the stockholders called for the purpose of considering any such act or contract, and any act or contract that shall be approved or ratified by the vote of the stockholders holding a majority of the issued and outstanding shares of stock of the Corporation entitled to vote and present in person or represented by proxy at such meeting (provided that a quorum is present), shall be as valid and as binding upon the Corporation and upon all the stockholders as if it had been approved or ratified by every stockholder of the Corporation. In addition, any such act or contract may be approved or ratified by the unanimous written consent of all stockholders holding the issued and outstanding shares of capital stock of the Corporation entitled to vote thereon.

     Section 13. Nominations for Election as a Director. Only persons who are nominated in accordance with the procedures set forth in these bylaws and qualify for nomination pursuant to Section 13 shall be eligible for election by stockholders as, and to serve as, directors. Nominations of persons for election to the Board of Directors of the Corporation may he made at a meeting of stockholders (a) by or at the direction of the Board of Directors or (b) by any stockholder of the Corporation who is a stockholder of record at the time of giving of notice provided for in this Section 13, who shall be entitled to vote for the election of directors at the meeting and who complies with the notice procedures set forth in this Section 13. Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the Secretary of the Corporation.

     To be timely, a stockholder’s notice shall be delivered to or mailed and received at the principal executive offices of the Corporation (i) with respect to an election to be held at the annual meeting of the stockholders of the Corporation, not less than 120 days prior to the anniversary date of the immediately preceding annual meeting of stockholders of the Corporation, and (ii) with respect to an election to be held at a special meeting of stockholders of the Corporation for the election of directors not later than the close of business on the tenth day following the day on which notice of the date of the special meeting was mailed to stockholders of the Corporation as provided in Section 13 or public disclosure of the date of the special meeting was made, whichever first occurs.

     Such stockholder’s notice to the Secretary shall set forth:

(x) as to each person whom the stockholder proposes to nominate for election or re-election as a director, all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, pursuant to Regulation l4A under the Securities Exchange Act of 1934, as amended (including such person’s written consent to being named in the proxy statement as a nominee and to serve as a director if elected), and

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(y) as to the stockholder giving the notice (i) the name and address, as they appear on the Corporation’s books, of such stockholder and (ii) the class and number of shares of voting stock of the Corporation which are beneficially owned by such stockholder.

     At the request of the Board of Directors, any person nominated by the Board of Directors for election as a director shall furnish to the Secretary of the Corporation that information required to be set forth in a stockholder’s notice of nomination that pertains to the nominee. In the event that a person is validly designated as a nominee to the Board of Directors in accordance with the procedures set forth in this Section 13 and shall thereafter become unable or unwilling to stand for election to the Board of Directors, the Board of Directors or the stockholder who proposed such nominee, as the case may be, may designate a substitute nominee. Other than directors chosen by the Board of Directors, no person shall be eligible to serve as a director of the Corporation unless nominated in accordance with the procedures set forth in this Section 13. The presiding officer of the meeting of stockholders shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribed by these bylaws, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded.

     Notwithstanding the foregoing provisions of this Section 13, a stockholder shall also comply with all applicable requirements of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder with respect to the matters set forth in this Section 13.

ARTICLE IV

COMMITTEES

     Section 1. Designation; Powers. The Board of Directors may, by resolution passed by a majority of the whole board, designate one or more committees, including an executive committee, each such committee to consist of one or more of the directors of the Corporation. Any such committee shall have and may exercise such of the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation as may be provided in such resolution, except that no such committee shall have the power or authority of the Board of Directors with regard to amending the Certificate of Incorporation, adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the Corporation’s property and assets, recommending to the stockholders a dissolution of the Corporation or a revocation of a dissolution of the Corporation, or amending, altering or repealing the bylaws or adopting new bylaws for the Corporation and, unless such resolution or the Certificate of Incorporation expressly so provides, no such committee shall have the power or authority to declare a dividend, to authorize the issuance of stock or to adopt a certificate of ownership and merger. Any such designated committee may authorize the seal of the Corporation to be affixed to all papers which may require it. In addition, such committee or committees shall have such other powers and limitations of authority as may be determined from time to time by resolution adopted by the Board of Directors.

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     Section 2. Procedure; Meetings; Quorum. Any committee designated pursuant to Article IV, Section 1 hereof, shall choose its own chairman and secretary, shall keep regular minutes of its proceedings and report the same to the Board of Directors when requested, shall fix its own rules or procedures, and shall meet at such times and at such place or places as may be provided by such rules or procedures, or by resolution of such committee or resolution of the Board of Directors. At every meeting of any such committee, the presence of a majority of all the members thereof shall constitute a quorum and the affirmative vote of a majority of the members present shall be necessary for the adoption by it of any resolution.

     Section 3. Substitution of Members. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of such committee. In the absence or disqualification of a member of a committee, the member or members present at any meeting and not disqualified from voting, whether or not constituting a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of the absent or disqualified member.

ARTICLE V

OFFICERS

     Section 1. Number, Titles and Term of Office. The officers of the Corporation shall be a President, one or more Vice Presidents (any one or more of whom may be designated Executive Vice President or Senior Vice President), a Secretary and, if the Board of Directors so elects, a Chairman of the Board and such other officers as the Board of Directors may from time to time elect or appoint. Each officer shall hold office until his successor shall be duly elected and shall qualify or until his death or until he shall resign or shall have been removed in the manner hereinafter provided. Any number of offices may be held by the same person, unless the Certificate of Incorporation provides otherwise. Except for the Chairman of the Board, if any, no officer need be a director.

     Section 2. Compensation. The salaries or other compensation, if any, of the officers and agents of the Corporation shall be fixed from time to time by the Board of Directors.

     Section 3. Removal. Any officer or agent elected or appointed by the Board of Directors may be removed, either with or without cause, by the vote of a majority of the whole Board of Directors at a special meeting called for such purpose, or at any regular meeting of the Board of Directors, provided the notice for such meeting shall specify that such proposed removal will be considered at the meeting; provided, however, that such removal shall be without prejudice to the contractual rights, if any, of the person so removed. Election or appointment of an officer or agent shall not of itself create contractual rights.

     Section 4. Vacancies. Any vacancy occurring in any office of the Corporation may be filled by the Board of Directors.

     Section 5. Powers and Duties of the Chief Executive Officer. The President shall be the chief executive officer of the Corporation unless the Board of Directors designates the

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Chairman of the Board or other officer as the chief executive officer. Subject to the control of the Board of Directors and the executive committee (if any), the chief executive officer shall have general executive charge, management and control of the properties, business and operations of the Corporation with all such powers as may be reasonably incident to such responsibilities; he may agree upon and execute all leases, contracts, evidences of indebtedness and other obligations in the name of the Corporation and may sign all certificates for shares of capital stock of the Corporation; and he shall have such other powers and duties as designated in accordance with these bylaws and as may be assigned to him from time to time by the Board of Directors.

     Section 6. Powers and Duties of the Chairman of the Board. The Chairman of the Board (if any) shall preside at all meetings of the stockholders and of the Board of Directors; and he shall have such other powers and duties as designated in accordance with these bylaws and as may be assigned to him from time to time by the Board of Directors.

     Section 7. Powers and Duties of the President. Unless the Board of Directors otherwise determines, the President shall have the authority to agree upon and execute all leases, contracts, evidences of indebtedness and other obligations in the name of the Corporation; and, unless the Board of Directors otherwise determines, he shall, in the absence of the Chairman of the Board or if there be no Chairman of the Board, preside at all meetings of the stockholders and (if he is a director) of the Board of Directors; and the President shall have such other powers and duties as designated in accordance with these bylaws and as may be assigned to him from time to time by the Board of Directors.

     Section 8. Vice Presidents. In the absence of the Chairman of the Board (if any) or the President, or in the event of their inability or refusal to act, a Vice President designated by the Board of Directors or, in the absence of such designation, the Vice President who is present and who is senior in terms of time as a Vice President of the Corporation, shall perform the duties of the Chairman of the Board (if any) or the President, as the case may be, and when so acting shall have all the powers of and be subject to all the restrictions upon the President; provided, however, that such Vice President shall not preside at meetings of the Board of Directors unless he is a director. Each Vice President shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe.

     Section 9. Secretary. The Secretary shall keep the minutes of all meetings of the Board of Directors, committees of directors and of the stockholders in books provided for such purpose; he shall attend to the giving and serving of all notices; he may in the name of the Corporation affix the seal of the Corporation to all contracts of the Corporation and attest thereto; he may sign with the other appointed officers all certificates for shares of capital stock of the Corporation; he shall have charge of the certificate books, transfer books and stock ledgers, and such other books and papers as the Board of Directors may direct, all of which shall at all reasonable times be open to inspection by any director upon application at the office of the Corporation during business hours; he shall have such other powers and duties as designated in accordance with these bylaws and as may be prescribed from time to time by the Board of Directors; and he shall in general perform all acts incident to the office of Secretary, subject to the control of the chief executive officer and the Board of Directors.

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     Section 10. Assistant Secretaries. Each Assistant Secretary (if any) shall have the usual powers and duties pertaining to his office, together with such other powers and duties as designated in accordance with these bylaws and as may be prescribed from time to time by the chief executive officer, the Board of Directors or the Secretary. The Assistant Secretaries shall exercise the powers of the Secretary during the Secretary’s absence or inability or refusal to act.

     Section 11. Action with Respect to Securities of Other Corporations. Unless otherwise determined by the Board of Directors, the chief executive officer shall have the power to vote and otherwise to act on behalf of the Corporation, in person or by proxy, at any meeting of security holders of any other corporation, or with respect to any action of security holders thereof, in which the Corporation may hold securities and otherwise, to exercise any and all rights and powers which the Corporation may possess by reason of its ownership of securities in such other corporation.

ARTICLE VI

INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS

     Section 1. Right to Indemnification. Subject to the limitations and conditions as provided in this Article VI, each person who was or is made a party to or is threatened to be made a party to or is involved in any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, arbitrative or investigative (other than an action by or in the right of the Corporation) (hereinafter a “proceeding”), or any appeal in such a proceeding or any inquiry or investigation that could lead to such a proceeding, by reason of the fact that he, or a person of whom he is the legal representative, is or was or has agreed to become a director or officer of the Corporation, or is or was serving or has agreed to serve at the request of the Corporation as a director, officer, partner, venturer, proprietor, trustee, employee, agent, or similar functionary of another foreign or domestic corporation, partnership, joint venture, sole proprietorship, trust, employee benefit plan or other enterprise, whether the basis of such proceeding is alleged action in an official capacity as a director or officer or in any other capacity while serving or having agreed to serve as a director or officer of the Corporation, shall be indemnified and held harmless by the Corporation to the fullest extent permitted by the Delaware General Corporation Law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than said law permitted the Corporation to provide prior to such amendment) against all reasonable expense, liability and loss (including without limitation, attorneys’ fees, judgments, fines, excise or similar taxes, punitive damages or penalties and amounts paid or to be paid in settlement) actually incurred or suffered by such person in connection with such proceeding, and such indemnification under this Article VI shall continue as to a person who has ceased to serve in the capacity which initially entitled such person to indemnity hereunder and shall inure to the benefit of his or her heirs, executors and administrators; provided, however, that the Corporation shall indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) initiated by such person only if such proceeding (or part thereof) was authorized by the Board of Directors of the Corporation. The right to indemnification granted pursuant to this Article VI shall be a contractual right, and

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no amendment, modification or repeal of this Article VI shall have the effect of limiting or denying any such rights with respect to actions taken or proceedings arising prior to any such amendment, modification or repeal. It is expressly acknowledged that the indemnification conferred in this Article VI could involve indemnification for negligence or under theories of strict liability.

     Section 2. Advance Payment. The right to indemnification conferred in this Article VI shall include the right to be paid or reimbursed by the Corporation for the reasonable expenses incurred by a person of the type entitled to be indemnified under Section 1 who was, is or is threatened to be made a named defendant or respondent in a proceeding in advance of the final disposition of the proceeding and without any determination as to the person’s ultimate entitlement to indemnification; provided, however, that the payment of such expenses incurred by any such person in advance of the final disposition of a proceeding shall be made only upon delivery to the Corporation of a written affirmation by such director or officer of his good faith belief that he has met the standard of conduct necessary for indemnification under this Article VI and a written undertaking, by or on behalf of such person, to repay all amounts so advanced if it shall ultimately be determined that such indemnified person is not entitled to be indemnified under this Article VI or otherwise.

     Section 3. Indemnification of Employees and Agents. The Corporation may, by action of its Board of Directors, provide indemnification to employees and agents of the Corporation, individually or as a group, with the same scope and effect as the indemnification of directors and officers provided for in this Article VI.

     Section 4. Appearance as a Witness. Notwithstanding any other provision of this Article VI, the Corporation may pay or reimburse expenses incurred by a director or officer in connection with his appearance as a witness or other participation in a proceeding at a time when he is not a named defendant or respondent in the proceeding.

     Section 5. Right of Claimant to Bring Suit. If a written claim received by the Corporation from or on behalf of an indemnified party under this Article VI is not paid in full by the Corporation within ninety days after such receipt, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall be entitled to be paid also the expense of prosecuting such claim. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition where the required undertaking, if any is required, has been tendered to the Corporation) that the claimant has not met the standards of conduct which make it permissible under the Delaware General Corporation Law for the Corporation to indemnify the claimant for the amount claimed, but the burden of proving such defense shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct.

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     Section 6. Nonexclusivity of Rights. The right to indemnification and advancement and payment of expenses conferred in this Article VI shall not be exclusive of any other rights which a director or officer or other person indemnified pursuant to this Article VI may have or hereafter acquire under any law (common or statutory), provision of the Certificate of Incorporation, these bylaws, any agreement, vote of stockholders or disinterested directors or otherwise.

     Section 7. Insurance. The Corporation may purchase and maintain insurance, at its expense, to protect itself and any person who is or was serving as a director, officer, employee or agent of the Corporation or is or was serving at the request of the Corporation as a director, officer, partner, venturer, proprietor, employee, agent or similar functionary of another domestic or foreign corporation, partnership, joint venture, proprietorship, employee benefit plan, trust or other enterprise against any expense, liability or loss asserted against any such person and incurred in any such capacity, or arising out of the person’s status as such, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under this Article VI.

     Section 8. Savings Clause. If this Article VI or any portion hereof shall be invalidated on any grounds by any court of competent jurisdiction, then the Corporation shall nevertheless indemnify and hold harmless each director, officer or any other person indemnified in accordance with this Article VI as to costs, charges and expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement with respect to any proceeding, to the full extent permitted by any applicable and valid portion of this Article VI to the fullest extent permitted by applicable law.

     Section 9. Definitions. For purposes of this Article, reference to the “Corporation” shall include, in addition to the Corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger prior to (or, in the case of an entity specifically designated in a resolution of the Board of Directors, after) the adoption hereof and which, if its separate existence had continued, would have had the power and authority to indemnify its directors, officers and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this Article with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued.

ARTICLE VII

CAPITAL STOCK

     Section 1. Certificates of Stock. The shares of the capital stock of the Corporation shall be represented by certificates, provided, however, that the Board of Directors may determine by resolution that some or all of any or all the classes or series of the Corporation’s stock shall be uncertificated shares. Any such resolution shall not apply to shares represented by

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a certificate until such certificate is surrendered to the Corporation. Notwithstanding the adoption of such a resolution by the Board of Directors, every holder of stock represented by certificates and, upon request, every holder of uncertificated shares shall be entitled to have a certificate signed by, or in the name of the Corporation by the Chairman of the Board of Directors (if any), the Chief Executive Officer (if any), the President or a Vice President, and by the Secretary or an Assistant Secretary of the Corporation representing the number of shares registered in certificate form. Any or all the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, such certificate may be issued by the Corporation with the same effect as if such person were such officer, transfer agent or registrar at the date of issue.

     Section 2. Transfer of Shares. The shares of stock of the Corporation shall only be transferable on the books of the Corporation by the holders thereof in person or by their duly authorized attorneys or legal representatives upon surrender and cancellation of certificates for a like number of shares (or upon compliance with the provisions of Article VII, Section 5 hereof, if applicable). Upon surrender to the Corporation or a transfer agent of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer (or upon compliance with the provisions of Article VII, Section 5 hereof, if applicable) and of compliance with any transfer restrictions applicable thereto contained in any agreement to which the Corporation is a party, or of which the Corporation has knowledge by reason of a legend with respect thereto placed upon any such surrendered stock certificate, it shall be the duty of the Corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books.

     Section 3. Ownership of Shares. The Corporation shall be entitled to treat the holder of record of any share or shares of capital stock of the Corporation as the owner in fact thereof at that time for purposes of voting such shares, receiving distributions thereon or notices in respect thereof, transferring such shares, exercising rights of dissent, exercising or waiving any preemptive rights, or giving proxies with respect to such shares; and, neither the Corporation nor any of its officers, directors, employees, or agents shall be liable for regarding that person as the owner of those shares at that time for those purposes, regardless of whether or not that person possesses a certificate for those shares.

     Section 4. Regulations Regarding Certificates. The Board of Directors shall have the power and authority to make all such rules and regulations as it may deem expedient concerning the issue, transfer and registration or the replacement of certificates for shares of capital stock of the Corporation.

     Section 5. Lost, Stolen. Destroyed or Mutilated Certificates. The Board of Directors may determine the conditions upon which a new certificate of stock may be issued in place of any certificate which is alleged to have been lost, stolen, destroyed or mutilated; and may, in its discretion, require the owner of such certificate or his legal representative to give bond, with sufficient surety, to indemnify the Corporation and each transfer agent and registrar against any and all losses or claims which may arise by reason of the issuance of a new certificate in the place of the one so lost, stolen, destroyed or mutilated.

17

ARTICLE VIII

MISCELLANEOUS PROVISIONS

     Section 1. Fiscal Year. The fiscal year of the Corporation shall be such as established from time to time by the Board of Directors.

     Section 2. Corporate Seal. The Board of Directors may provide a suitable seal containing the name of the Corporation. The Secretary shall have charge of the seal (if any). If and when so directed by the Board of Directors or a committee thereof, duplicates of the seal may be kept and used by an Assistant Secretary.

     Section 3. Notice and Waiver of Notice. Whenever any notice is required to be given by law, the Certificate of Incorporation or these bylaws, except with respect to notices of meetings of stockholders (with respect to which the provisions of Article II, Section 6 hereof apply) and except with respect to notices of special meetings of directors (with respect to which the provisions of Article III, Section 6 hereof apply) said notice shall be deemed to be sufficient if given (i) by telegraphic, cable or wireless transmission or (ii) by deposit of such postage prepaid notice, in a post office box addressed to the person entitled thereto at his address as it appears on the records of the Corporation. Such notice shall be deemed to have been given on the day of such transmission or mailing, as the case may be.

     Whenever notice is required to be given by law, the Certificate of Incorporation or these bylaws, a written waiver thereof, signed by the person entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders, directors, or a committee of directors need be specified in any written waiver of notice unless so required by the Certificate of Incorporation or these bylaws.

     Section 4. Resignations. Any director, member of a committee or officer may resign at any time. Such resignation shall be made in writing and shall take effect at the time specified therein, or if no time be specified, at the time of its receipt by the chief executive officer or Secretary. The acceptance of a resignation shall not be necessary to make such resignation effective, unless expressly so provided in the resignation.

     Section 5. Facsimile Signatures. In addition to the provisions for the use of facsimile signatures elsewhere specifically authorized elsewhere in these bylaws, facsimile signatures of any officer or officers of the Corporation may be used as determined by the Board of Directors.

     Section 6. Reliance upon Books, Reports and Records. A member of the Board of Directors, or a member of any committee thereof, shall be fully protected in relying in good faith upon the records of the Corporation and upon such information, opinions, reports or statements presented to the Corporation by any of its officers or employees, or committees of the Board of Directors, or by any other person as to matters the director reasonably believes are within such

18

other person’s professional or expert competence and who has been selected with reasonable care by or on behalf of the Corporation, as to the value and amount of the assets, liabilities and/or net profits of the Corporation, or any other facts pertinent to the existence and amount of surplus or other funds from which dividends might properly be declared and paid, or with which the Corporation’s stock might properly be purchased or redeemed.

ARTICLE IX

AMENDMENTS

     The original or other bylaws of the Corporation may be adopted, amended or repealed by the incorporators, by the initial directors if they are named in the Certificate of Incorporation, or, before the Corporation has received any payment for any of its stock, by its Board of Directors. After the Corporation has received any payment for any of its stock, the power to adopt, amend or repeal bylaws shall reside in the stockholders entitled to vote; provided, however, the Corporation may, in the Certificate of Incorporation, confer the power to adopt, amend or repeal bylaws upon the directors. The fact that such power has been so conferred upon the directors, shall not divest the stockholders of the power, nor limit their power to adopt, amend or repeal bylaws. Notwithstanding anything to the contrary herein, no amendment to or repeal of Article II, Section 3; Article II, Section 4; Article II, Section 13; Article III, Section 1; Article III, Section 2; Article III, Section 9; Article III, Section 13 or this Article IX shall be effective, nor may any other bylaw be amended, adopted or repealed that will have the effect of modifying or permitting the circumvention of such bylaws, without the affirmative vote of (i) a majority of the Board of Directors or (ii) holders of outstanding shares of common stock representing 80% or more of the voting power of the outstanding voting securities of the Corporation

As amended and restated through February 4, 2004.

19

EX-10.14

Exhibit 10.14

Execution Version

AMENDMENT NO. 4 AND WAIVER

     This Amendment No. 4 and Waiver dated as of July 12, 2006 (the “Agreement”) is among Stone Energy Corporation, a Delaware corporation (“Borrower”), the financial institutions party to the Credit Agreement described below as Banks (“Banks”), and Bank of America, N.A., as Agent for the Banks (“Agent”) and as Issuing Bank (“Issuing Bank”).

INTRODUCTION

     A. The Borrower, the Banks, the Issuing Bank, and the Agent have entered into the Credit Agreement dated as of April 30, 2004, as amended by Amendment No. 1 dated as of December 14, 2004, Amendment No. 2 dated as of March 28, 2006, and Amendment No. 3 and Waiver dated as of June 16, 2006 (as so amended, the “Credit Agreement”).

     B. Borrower has requested that the Banks (i) amend the Credit Agreement to increase the sublimit for Letters of Credit issued thereunder to $75,000,000 and (ii) waive any default under Section 2.6(a)(i)(A) of the Credit Agreement caused by the issuance of Issuing Bank’s Letter of Credit #3083069 on July 7, 2006 for the Borrower’s account, for the benefit of BP Exploration & Production, Inc., in the face amount of $34,000,000, and with an expiration date of June 5, 2007 (the “Acquisition L/C”).

     THEREFORE, in fulfillment of the foregoing, Borrower, Agent, the Issuing Bank, and the Banks hereby agree as follows:

     Section 1. Definitions; References. Unless otherwise defined in this Agreement, each term used in this Agreement which is defined in the Credit Agreement has the meaning assigned to such term in the Credit Agreement.

     Section 2. Amendment. Effective as of the date specified in Section 6 of this Agreement, Section 2.6(a)(i)(A) of the Credit Agreement is amended to delete the reference therein to “$50,000,000” and replace it with a reference to “$75,000,000”.

     Section 3. Waiver. Notwithstanding any provisions in the Credit Agreement and the other Credit Documents to the contrary, the Banks hereby waive any existing Default or Event of Default under Section 2.6(a)(i)(A) of the Credit Agreement caused by the issuance of the Acquisition L/C. This waiver is limited to the extent described herein and shall not be construed to be a waiver of any other default or condition under or action prohibited by the Credit Agreement. The Agent and the Banks reserve the right to exercise any rights and remedies available to them in connection with any future defaults or unmet conditions precedent under the Credit Agreement or any other provision of any Credit Document.

     Section 4. Reaffirmation of Liens.

          (a) The Borrower (i) is party to certain Security Documents securing and supporting the Borrower’s obligations under the Credit Documents, (ii) represents and warrants that it has no defenses to the enforcement of the Security Documents and that according to their terms the Security Documents will continue in full force and effect to secure the Borrower’s obligations under the Credit Documents, as the same may be amended, supplemented, or otherwise modified, and (iii) acknowledges, represents, and warrants that the liens and security interests created by the Security Documents are valid and subsisting and create an Acceptable Security Interest in the Collateral to secure the Borrower’s obligations under the Credit Documents, as the same may be amended, supplemented, or otherwise modified.

          (b) The delivery of this Agreement does not indicate or establish a requirement that any Guaranty or Security Document requires the Borrower’s or any Guarantor’s approval of amendments to the Credit Agreement.

     Section 5. Representations and Warranties. The Borrower represents and warrants to the Agent and the Banks that:

          (a) the representations and warranties set forth in the Credit Agreement and in the other Credit Documents are true and correct in all material respects as of the date of this Agreement;

          (b) (i) the execution, delivery, and performance of this Agreement are within the corporate power and authority of the Borrower and have been duly authorized by appropriate proceedings and (ii) this Agreement constitutes a legal, valid, and binding obligation of the Borrower, enforceable against the Borrower in accordance with its terms, except as limited by applicable bankruptcy, insolvency, reorganization, moratorium, or similar laws affecting the rights of creditors generally and general principles of equity; and

          (c) as of the effectiveness of this Agreement and after giving effect thereto, no Default or Event of Default has occurred and is continuing.

     Section 6. Effectiveness. This Agreement shall become effective as of the date hereof, and the Credit Agreement shall be amended as provided herein, upon the occurrence of all of the following: (a) the Majority Banks’ and the Borrower’s duly and validly executing originals of this Agreement and delivery thereof to the Agent, (b) the representations and warranties in this Agreement being true and correct in all material respects before and after giving effect to this Agreement, and (c) the Borrower shall have paid all costs, expenses, and fees which have been invoiced and are payable pursuant to Section 9.4 of the Credit Agreement or any other written agreement.

     Section 7. Effect on Credit Documents. Except as amended herein, the Credit Agreement and the Credit Documents remain in full force and effect as originally executed, and nothing herein shall act as a waiver of any of the Agent’s or Banks’ rights under the Credit Documents, as amended. This Agreement is a Credit Document for the purposes of the provisions of the other Credit Documents. Without limiting the foregoing, any breach of representations, warranties, and covenants under this Agreement may be a Default or Event of Default under other Credit Documents.

-2-

     Section 8. Choice of Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Texas.

     Section 9. Counterparts. This Agreement may be signed in any number of counterparts, each of which shall be an original.

[The remainder of this page has been left blank intentionally.]

-3-

     THIS WRITTEN AGREEMENT AND THE CREDIT DOCUMENTS, AS DEFINED IN THE CREDIT AGREEMENT, REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.

     EXECUTED as of the date first set forth above.

BORROWER: STONE ENERGY CORPORATION
By:	/s/ Kenneth H. Beer
Name:		Kenneth H. Beer
Title:		Senior Vice President and Chief Financial Officer

By:	/s/ J. Kent Pierret
Name:		J. Kent Pierret
Title:		Senior Vice President, Chief Accounting Officer and Treasurer

Signature Page to Amendment No. 4 and Waiver

AGENT AND ISSUING BANK: BANK OF AMERICA, N.A., as Agent and Issuing Bank
By:	/s/ Ronald E. McKaig
Name:		Ronald E. McKaig
Title:		Senior Vice President

BANKS: BANK OF AMERICA, N.A.
By:	/s/ Ronald E. McKaig
Name:		Ronald E. McKaig
Title:		Senior Vice President

Signature Page to Amendment No. 4 and Waiver

JPMORGAN CHASE BANK, N.A.
By:	/s/Jo Linda Papadakis
Name:		Jo Linda Papadakis
Title:		Vice President

-2- 

BMO CAPITAL MARKETS FINANCING, INC. F/K/A HARRIS NESBITT FINANCING, INC.
By:	/s/ Mary Lou Allen
Name:		Mary Lou Allen
Title:		Vice President

Signature Page to Amendment No. 4 and Waiver

UNION BANK OF CALIFORNIA, N.A.
By:	/s/Alison Fuqua
Name:		Alison Fuqua
Title:		Investment Banking Officer

Signature Page to Amendment No. 4 and Waiver

U.S. BANK NATIONAL ASSOCIATION
 

By:  

Name:  

Title:

Signature Page to Amendment No. 4 and Waiver

BNP PARIBAS
By:	/s/ Douglas R. Liftman      /s/ Polly Schott
Name:		Douglas R. Liftman      Polly Schott
Title:		Managing Director      Vice President

Signature Page to Amendment No. 4 and Waiver

THE ROYAL BANK OF SCOTLAND PLC
By:	/s/Robert E. Poirrier Jr.
Name:		Robert E. Poirrier Jr.
Title:		Vice President

Signature Page to Amendment No. 4 and Waiver

UFJ BANK LIMITED
 

By:  

Name:  

Title:  

Signature Page to Amendment No. 4 and Waiver

WHITNEY NATIONAL BANK
By:	/s/Trudy W. Nelson
Name:		Trudy W. Nelson
Title:		Vice President

Signature Page to Amendment No. 4 and Waiver

COMERICA BANK
By:	/s/Huma Vadgama
Name:		Huma Vadgama
Title:		Vice President

Signature Page to Amendment No. 4 and Waiver

MIZUHO CORPORATE BANK, LTD.
By:	/s/Takahiko Ueda
Name:		Takahiko Ueda
Title:		Deputy General Manager

Signature Page to Amendment No. 4 and Waiver

BANK OF SCOTLAND
By:	/s/Karen Weich
Name:		Karen Weich
Title:		Assistant Vice President

Signature Page to Amendment No. 4 and Waiver

HIBERNIA NATIONAL BANK
By:	/s/David R. Reid
Name:		David R. Reid
Title:		Senior Vice President

Signature Page to Amendment No. 4 and Waiver

NATEXIS BANQUES POPULAIRES
By:	/s/Donovan C. Broussard
Name:		Donovan C. Broussard
Title:		Vice President & Group Manager

By:	/s/Daniel Payer
Name:		Daniel Payer
Title:		Vice President

Signature Page to Amendment No. 4 and Waiver

EX-10.15

Exhibit 10.15

Execution Version

AMENDMENT NO. 5

     This Amendment No. 5 dated as of December 31, 2006 (the “Agreement”) is among Stone Energy Corporation, a Delaware corporation (“Borrower”), the financial institutions party to the Credit Agreement described below as Banks (“Banks”), and Bank of America, N.A., as Agent for the Banks (“Agent”) and as Issuing Bank (“Issuing Bank”).

INTRODUCTION

     A. The Borrower, the Banks, the Issuing Bank, and the Agent have entered into the Credit Agreement dated as of April 30, 2004, as amended by Amendment No. 1 dated as of December 14, 2004, Amendment No. 2 dated as of March 28, 2006, Amendment No. 3 and Waiver dated as of June 16, 2006, and Amendment No. 4 and Waiver dated as of July 12, 2006 (as so amended, the “Credit Agreement”).

     B. Borrower has requested that the Banks amend the definitions of “EBITDA”, “Net Income”, and “Tangible Net Worth” in the Credit Agreement.

     THEREFORE, in fulfillment of the foregoing, Borrower, Agent, the Issuing Bank, and the Banks hereby agree as follows:

     Section 1. Definitions; References. Unless otherwise defined in this Agreement, each term used in this Agreement which is defined in the Credit Agreement has the meaning assigned to such term in the Credit Agreement.

     Section 2. Amendment. Effective as of the date specified in Section 5 of this Agreement, the Credit Agreement is amended as follows:

          (a) The definition of “EBITDA” in Section 1.1 of the Credit Agreement shall be amended to read in its entirety as follows:

     “EBITDA” means, with respect to any Person and for any period of its determination, the consolidated Net Income of such Person for such period, plus the consolidated interest expense, income taxes, depreciation, depletion, and amortization of such Person for such period.

          (b) The definition of “Net Income” in Section 1.1 of the Credit Agreement shall be amended to read in its entirety as follows:

     “Net Income” means, for any Person and for any period of its determination, the net income of such Person determined in accordance with GAAP, excluding, without duplication, the non-cash impact of (a) impairments, (b) full cost ceiling test write downs, (c) gains or losses on sale of property, (d) extraordinary items, and (e) accretion expense (in accordance with SFAS No. 143).

          (c) The definition of “Tangible Net Worth” in Section 1.1 of the Credit Agreement shall be amended to read in its entirety as follows:

     “Tangible Net Worth” means, for any Person that is a corporation and as of the date of its determination, the consolidated Net Worth of such Person, excluding all consolidated intangible assets of such Person, as determined in accordance with GAAP, and excluding the non-cash impact on retained earnings of (a) impairments, (b) full cost ceiling test write downs, and (c) gains or losses on sale of property.

     Section 3. Reaffirmation of Liens.

          (a) The Borrower (i) is party to certain Security Documents securing and supporting the Borrower’s obligations under the Credit Documents, (ii) represents and warrants that it has no defenses to the enforcement of the Security Documents and that according to their terms the Security Documents will continue in full force and effect to secure the Borrower’s obligations under the Credit Documents, as the same may be amended, supplemented, or otherwise modified, and (iii) acknowledges, represents, and warrants that the liens and security interests created by the Security Documents are valid and subsisting and create an Acceptable Security Interest in the Collateral to secure the Borrower’s obligations under the Credit Documents, as the same may be amended, supplemented, or otherwise modified.

          (b) The delivery of this Agreement does not indicate or establish a requirement that any Guaranty or Security Document requires the Borrower’s or any Guarantor’s approval of amendments to the Credit Agreement.

     Section 4. Representations and Warranties. The Borrower represents and warrants to the Agent and the Banks that:

          (a) the representations and warranties set forth in the Credit Agreement and in the other Credit Documents are true and correct in all material respects as of the date of this Agreement;

          (b) (i) the execution, delivery, and performance of this Agreement are within the corporate power and authority of the Borrower and have been duly authorized by appropriate proceedings and (ii) this Agreement constitutes a legal, valid, and binding obligation of the Borrower, enforceable against the Borrower in accordance with its terms, except as limited by applicable bankruptcy, insolvency, reorganization, moratorium, or similar laws affecting the rights of creditors generally and general principles of equity; and

          (c) as of the effectiveness of this Agreement and after giving effect thereto, no Default or Event of Default has occurred and is continuing.

     Section 5. Effectiveness. This Agreement shall become effective as of the date hereof, and the Credit Agreement shall be amended as provided herein, upon the occurrence of all of the following: (a) the Majority Banks’ and the Borrower’s duly and validly executing originals of this Agreement and delivery thereof to the Agent, (b) the representations and warranties in this Agreement being true and correct in all material respects before and after giving effect to this Agreement, and (c) the Borrower’s having paid all costs, expenses, and fees which have been invoiced and are payable pursuant to Section 9.4 of the Credit Agreement or any other written agreement.

     Section 6. Effect on Credit Documents. Except as amended herein, the Credit Agreement and the Credit Documents remain in full force and effect as originally executed, and nothing herein shall act as a waiver of any of the Agent’s or Banks’ rights under the Credit Documents, as amended. This Agreement is a Credit Document for the purposes of the provisions of the other Credit Documents.

-2-

Without limiting the foregoing, any breach of representations, warranties, and covenants under this Agreement may be a Default or Event of Default under other Credit Documents.

     Section 7. Choice of Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Texas.

     Section 8. Counterparts. This Agreement may be signed in any number of counterparts, each of which shall be an original.

[The remainder of this page has been left blank intentionally.]

-3-

     THIS WRITTEN AGREEMENT AND THE CREDIT DOCUMENTS, AS DEFINED IN THE CREDIT AGREEMENT, REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.

     EXECUTED as of the date first set forth above.

BORROWER: STONE ENERGY CORPORATION
By:	/s/Kenneth H. Beer
Name:		Kenneth H. Beer
Title:		Senior Vice President and Chief Financial Officer

By:	/s/J. Kent Pierret
Name:		J. Kent Pierret
Title:		Senior Vice President, Chief Accounting Officer and Treasurer

Signature Page to Amendment No. 5

AGENT AND ISSUING BANK: BANK OF AMERICA, N.A., as Agent and Issuing Bank
By:	/s/ Ronald E. McKaig
Name:		Ronald E. McKaig
Title:		Senior Vice President

BANKS: BANK OF AMERICA, N.A.
By:	/s/ Ronald E. McKaig
Name:		Ronald E. McKaig
Title:		Senior Vice President

Signature Page to Amendment No. 5

JPMORGAN CHASE BANK, N.A.
By:	/s/Jo Linda Papadakis
Name:		Jo Linda Papadakis
Title:		Vice President

Signature Page to Amendment No. 5

BMO CAPITAL MARKETS FINANCING, INC. F/K/A HARRIS
NESBITT FINANCING, INC.
 

By:  

Name:  

Title:  

Signature Page to Amendment No. 5

UNION BANK OF CALIFORNIA, N.A.
By:	s/Alison Fuqua
Name:		Alison Fuqua
Title:		Investment Banking Officer

Signature Page to Amendment No. 5

U.S. BANK NATIONAL ASSOCIATION
By:	/s/Justin M. Alexander
Name:		Justin M. Alexander
Title:		Vice President

Signature Page to Amendment No. 5

BNP PARIBAS
By:	/s/ Douglas R. Liftman      /s/ Polly Schott
Name:		Douglas R. Liftman      Polly Schott
Title:		Managing Director      Vice President

Signature Page to Amendment No. 5

THE ROYAL BANK OF SCOTLAND PLC
 

By:  

Name:  

Title:  

Signature Page to Amendment No. 5

UFJ BANK LIMITED
 

By:  

Name:  

Title:  

Signature Page to Amendment No. 5

WHITNEY NATIONAL BANK
By:	/s/Trudy W. Nelson
Name:		Trudy W. Nelson
Title:		Vice President

Signature Page to Amendment No. 5

COMERICA BANK
By:	/s/Josh Strong
Name:		Josh Strong
Title:		Corporate Banking Officer

Signature Page to Amendment No. 5

MIZUHO CORPORATE BANK, LTD.
By:	/s/Leon Mo
Name:		Leon Mo
Title:		Senior Vice President

Signature Page to Amendment No. 5

BANK OF SCOTLAND
By:	/s/Karen Weich
Name:		Karen Weich
Title		Vice President

Signature Page to Amendment No. 5

CAPITAL ONE, N.A.
By:	/ s/Paul D. Hein
Name:		Paul D. Hein
Title:		Vice President

Signature Page to Amendment No. 5

NATIXIS
By:	/s/Louis P. Laville, III
Name:		Louis P. Laville, III
Title:		Managing Director

By:	/s/Timothy L. Polvado
Name:		Timothy L. Polvado
Title:		Managing Director

Signature Page to Amendment No. 5

EX-21.1

Exhibit 21.1

STONE ENERGY CORPORATION

SUBSIDIARIES AS OF DECEMBER 31, 2006

Stone Energy, L.L.C., a Delaware limited liability company

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the Registration Statements (Forms S-8 Nos. 33-67332, 333-51968, 333-64448, 333-87849 and 333-107440, and Form S-3 No. 333-86450) of Stone Energy Corporation and in the related Prospectuses of our reports dated February 23, 2007, with respect to the consolidated financial statements of Stone Energy Corporation, Stone Energy Corporation management’s assessment of the effectiveness of internal control over financial reporting and the effectiveness of internal control over financial reporting of Stone Energy Corporation, included in this Form 10-K for the year ended December 31, 2006.

/s/ Ernst & Young LLP  

New Orleans, Louisiana
February 23, 2007

EX-23.2

Exhibit 23.2

CONSENT OF INDEPENDENT PETROLEUM ENGINEERS AND GEOLOGISTS

     We do hereby consent to the use of our name in “Item 2. Properties” of the Annual Report on Form 10-K of Stone Energy Corporation (the “Company”) for the year ended December 31, 2006 and to the incorporation by reference thereof into the Company’s previously filed Registration Statements on Form S-8 (Registration Nos. 33-67332, 333-51968, 333-64448, 333-87849 and 333-107440), S-3 (Registration No. 333-86450) and S-4 (Registration Nos. 333-81380 and 333-122423).

NETHERLAND, SEWELL & ASSOCIATES, INC.

By:	/s/ Danny D. Simmons
	Danny D. Simmons, P.E.
	Executive Vice President

Houston, Texas
February 23, 2007

EX-23.3

Exhibit 23.3

CONSENT OF INDEPENDENT PETROLEUM ENGINEERS

     We do hereby consent to the use of our name in “Item 2. Properties” of the Annual Report on Form 10-K of Stone Energy Corporation (the “Company”) for the year ended December 31, 2006 and to the incorporation by reference thereof into the Company’s previously filed Registration Statements on Form S-8 (Registration Nos. 33-67332, 333-51968, 333-64448, 333-87849 and 333-107440), S-3 (Registration No. 333-86450) and S-4 (Registration Nos. 333-81380 and 333-122423).

By:	/s/ Ryder Scott Company, L.P.
	RYDER SCOTT COMPANY, L.P.

Denver, Colorado
February 23, 2007

EX-31.1

Exhibit 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

I, David H. Welch, President and Chief Executive Officer of Stone Energy Corporation, certify that:

1.	I have reviewed this Annual Report on Form 10-K of Stone Energy Corporation;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiary, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

February 26, 2007	/s/ David H. Welch David H. Welch
	President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

I, Kenneth H. Beer, Senior Vice President and Chief Financial Officer of Stone Energy Corporation, certify that:

1.	I have reviewed this Annual Report on Form 10-K of Stone Energy Corporation;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiary, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

February 26, 2007	/s/ Kenneth H. Beer Kenneth H. Beer
	Senior Vice President and Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND
CHIEF FINANCIAL OFFICER

     Pursuant to 18 U.S.C. § 1350 and in connection with the accompanying report on Form 10-K for the year ended December 31, 2006 that is being filed concurrently with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned officers of Stone Energy Corporation (the “Company”) hereby certifies, to the best of his knowledge, that:

(i.) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(ii.) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

February 26, 2007	/s/ David H. Welch David H. Welch
	President and Chief Executive Officer
	/s/ Kenneth H. Beer Kenneth H. Beer
	Senior Vice President and Chief Financial Officer