e10vq

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended March 31, 2008


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

For the transition period from to

Commission file number 1-12074

STONE ENERGY CORPORATION

(Exact Name of Registrant as Specified in Its Charter)


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

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

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

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

Yes þ No o

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


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

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

Yes o No þ

As of May 2, 2008, there were 28,469,326 shares of the registrant’s Common Stock, par value $.01 per share, outstanding.

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

STONE ENERGY CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEET

(In thousands of dollars)


	March 31,			December 31,
	2008			2007
	(Unaudited)			(Note 1)
Assets
Current assets:
Cash and cash equivalents	$	517,033		$	475,126
Accounts receivable		153,944			186,853
Fair value of hedging contracts		306			2,163
Deferred tax asset		18,296			9,039
Other current assets		494			521

Total current assets		690,073			673,702
Oil and gas properties — United States — full cost method of accounting:
Proved, net of accumulated depreciation, depletion and amortization of $2,264,751 and $2,158,327, respectively		949,432			1,001,179
Unevaluated		194,476			150,568
Oil and gas properties — China — full cost method of accounting:
Unevaluated, net of accumulated depreciation, depletion and amortization of $8,164 and $8,164, respectively		30,328			29,565
Building and land, net		5,653			5,667
Fixed assets, net		5,277			5,584
Other assets, net		23,443			23,338
Fair value of hedging contracts		3,222			—

Total assets	$	1,901,904		$	1,889,603


Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable to vendors	$	95,582		$	88,801
Undistributed oil and gas proceeds		31,852			37,743
Fair value of hedging contracts		27,188			18,968
Asset retirement obligations		46,353			44,180
Current income taxes payable		13,950			57,631
Other current liabilities		11,353			13,934

Total current liabilities		226,278			261,257
Long-term debt		400,000			400,000
Deferred taxes		114,155			89,665
Asset retirement obligations		201,722			245,610
Other long-term liabilities		8,003			7,269

Total liabilities		950,158			1,003,801


Commitments and contingencies

Common stock		279			278
Treasury stock		(860	)		(1,161	)
Additional paid-in capital		522,863			515,055
Retained earnings		444,486			382,365
Accumulated other comprehensive loss		(15,022	)		(10,735	)

Total stockholders’ equity		951,746			885,802

Total liabilities and stockholders’ equity	$	1,901,904		$	1,889,603

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

STONE ENERGY CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)


	Three Months Ended
	March 31,
	2008			2007
Operating revenue:
Oil production	$	122,707		$	93,584
Gas production		80,526			79,749

Total operating revenue		203,233			173,333


Operating expenses:
Lease operating expenses		30,253			51,086
Production taxes		1,400			3,864
Depreciation, depletion and amortization		63,387			78,839
Accretion expense		4,368			4,416
Salaries, general and administrative expenses		10,256			8,233
Incentive compensation expense		1,018			846
Derivative expenses, net		259			500

Total operating expenses		110,941			147,784


Income from operations		92,292			25,549


Other (income) expenses:
Interest expense		3,859			11,191
Interest income		(4,914	)		(574	)
Other income, net		(1,041	)		(1,301	)

Total other (income) expenses		(2,096	)		9,316


Income before taxes		94,388			16,233


Provision for income taxes:
Current		13,950			—
Deferred		18,196			5,757

Total income taxes		32,146			5,757


Net income	$	62,242		$	10,476


Basic earnings per share	$	2.24		$	0.38
Diluted earnings per share	$	2.22		$	0.38

Average shares outstanding		27,819			27,541
Average shares outstanding assuming dilution		28,060			27,577

The accompanying notes are an integral part of this statement.

STONE ENERGY CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(In thousands of dollars)

(Unaudited)


	Three Months Ended
	March 31,
	2008			2007
Cash flows from operating activities:
Net income	$	62,242		$	10,476
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, depletion and amortization		63,387			78,839
Accretion expense		4,368			4,416
Deferred income tax provision		18,196			5,757
Settlement of asset retirement obligations		(18,647	)		—
Non-cash stock compensation expense		2,137			1,368
Excess tax benefits		(659	)		—
Non-cash derivative expense		259			500
Other non-cash expenses		365			778
Decrease in current income taxes payable		(43,550	)		—
Decrease in accounts receivable		32,909			1,552
(Increase) decrease in other current assets		16			(80	)
Increase (decrease) in accounts payable		(200	)		600
Increase (decrease) in other current liabilities		(8,473	)		5,524
Other		(36	)		(4	)

Net cash provided by operating activities		112,314			109,726


Cash flows from investing activities:
Investment in oil and gas properties		(91,216	)		(83,246	)
Proceeds from sale of oil and gas properties, net of expenses		16,485			—
Investment in fixed and other assets		(276	)		(447	)

Net cash used in investing activities		(75,007	)		(83,693	)


Cash flows from financing activities:
Repayments of bank borrowings		—			(20,000	)
Excess tax benefits		659			—
Net proceeds from exercise of stock options and vesting of restricted stock		3,941			450

Net cash provided by (used in) financing activities		4,600			(19,550	)


Net increase in cash and cash equivalents		41,907			6,483

Cash and cash equivalents, beginning of period		475,126			58,862


Cash and cash equivalents, end of period	$	517,033		$	65,345

The accompanying notes are an integral part of this statement.

STONE ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 — Interim Financial Statements

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

Note 2 — Earnings Per Share

Basic net income per share of common stock was calculated by dividing net income applicable to common stock by the weighted-average number of common shares outstanding during the period. Diluted net income per share of common stock was calculated by dividing net income applicable to common stock by the weighted-average number of common shares outstanding during the period plus the weighted-average number of dilutive stock options and restricted stock granted to outside directors and employees. There were approximately 241,000 and 36,000 dilutive shares for the three months ended March 31, 2008 and 2007, respectively.

Stock options that were considered antidilutive because the exercise price of the option exceeded the average price of our common stock for the applicable period totaled approximately 398,000 and 1,186,000 shares in the three months ended March 31, 2008 and 2007, respectively.

During the three months ended March 31, 2008 and 2007, approximately 176,000 and 27,000 shares of common stock, respectively, were issued upon the exercise of stock options and vesting of restricted stock by employees and nonemployee directors and the awarding of employee bonus stock pursuant to the 2004 Amended and Restated Stock Incentive Plan.

Note 3 — Disposition of Assets

In the first quarter of 2008, we completed the divesture of a small package of Gulf of Mexico properties which totaled 17.4 billion cubic feet of natural gas equivalent (Bcfe) of reserves at December 31, 2007 for a cash consideration of approximately $16.5 million after closing adjustments. The properties that were sold had estimated asset retirement obligations of $27.4 million. These properties were mature, high cost properties with minimal exploitation or exploration opportunities. The sale of these oil and gas properties was accounted for as an adjustment of capitalized costs with no gain or loss recognized.

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

Note 4 — Hedging Activities

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

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


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


*		January — March

**		April — December

Fixed-Price Swaps

Natural Gas

Oil

Daily

Volume

Swap

Volume

Swap

(MMBtus/d)

Price

(Bbls/d)

Price

2009

20,000

10.15

2,000

107.90

Put Contracts

Natural Gas

Daily

Volume

Floor

Unamortized

(MMBtus/d)

Price

Cost

2008

20,000

10.00

$0.52/MMBtu


*		July — December

Effective zero-premium collars increased our natural gas revenue by $0.9 million and reduced oil revenue by $5.2 million during the three months ended March 31, 2008. During the three months ended March 31, 2007, we realized a net increase in natural gas revenue of $1.1 million and a net increase in oil revenue of $1.1 million related to our effective zero-premium collars.

During the quarters ended March 31, 2008 and 2007, certain of our derivative contracts were determined to be partially ineffective because of differences in the relationship between the fixed price in the derivative contract and actual prices realized. Derivative expense for the three months ended March 31, 2008 and 2007 totaled $0.3 million and $0.5 million, respectively, representing changes in the fair market value of the ineffective portion of the derivatives.

Note 5 — Long-Term Debt

Long-term debt consisted of the following at:


	March 31,		December 31,
	2008		2007
	($ in millions)
8¹/4% Senior Subordinated Notes due 2011	$	200,000	$	200,000
6³/4% Senior Subordinated Notes due 2014		200,000		200,000

Total long-term debt	$	400,000	$	400,000

At March 31, 2008, we had no outstanding borrowings under our bank credit facility and letters of credit totaling $52.8 million had been issued pursuant to the facility. On November 1, 2007, we entered into a new $300 million senior secured credit facility, maturing July 1, 2011, with a syndicated bank group. The new facility has an initial borrowing base of $175 million and replaces the previous $500 million credit facility. As of May 2, 2008, after accounting for the $52.8 million of letters of credit, we had $122.2 million of borrowings available under the new credit facility. 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 new credit facility, we must (i) maintain a ratio of consolidated debt to consolidated EBITDA, as defined in the credit agreement, for the preceding four quarterly periods of not greater than 3.25 to 1.0 and (ii) maintain a ratio of EBITDA to consolidated Net Interest, as defined in the credit agreement, for the preceding four quarterly periods of not less than 3.0 to 1.0. In addition, the new 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 but do allow for limited stock repurchases.

Note 6 — Comprehensive Income

The following table illustrates the components of comprehensive income for the three months ended March 31, 2008 and 2007:


	Three Months Ended
	March 31,
	2008			2007
	($ in millions)
Net income	$	62.2		$	10.5
Other comprehensive (loss), net of tax effect:
Adjustment for fair value accounting of derivatives		(4.3	)		(9.4	)

Comprehensive income	$	57.9		$	1.1

Note 7 — Asset Retirement Obligations

The change in our asset retirement obligations during the first quarter of 2008 is set forth below (in millions):


	Three Months
	Ended
	March 31, 2008
Asset retirement obligations as of the beginning of the period, including current portion	$	289.8
Liabilities incurred		—
Liabilities settled		(18.7	)
Divestment of properties		(27.4	)
Accretion expense		4.4
Revision of estimates		—

Asset retirement obligations as of the end of the period, including current portion	$	248.1

Note 8 — International Operations

During 2006, we entered into an agreement to participate in the drilling of exploratory wells on two offshore concessions in Bohai Bay, China. After the drilling of three wells, it has been determined that additional drilling will be necessary to evaluate the commercial viability of this project. We have the potential to earn an interest in 750,000 acres on these two concessions. In 2007, our investment was deemed to be impaired in the amount of $8.2 million. Included in unevaluated oil and gas property costs at March 31, 2008 are $30.3 million of capital expenditures related to our properties in Bohai Bay, China.

Note 9 — Fair Value Measurements

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

The following tables present our assets and liabilities that are measured at fair value on a recurring basis during the quarter ended March 31, 2008 and are categorized using the fair value hierarchy. The fair value hierarchy has three levels based on the reliability of the inputs used to determine the fair value.


	Fair Value Measurements at March 31, 2008
			Quoted Prices in		Significant
			Active Markets		Other		Significant
			for Identical		Observable		Unobservable
			Assets		Inputs		Inputs
Assets	Total		(Level 1)		(Level 2)		(Level 3)
	($ in millions)
Money market funds	$	470.0	$	470.0	$	—	$	—
Hedging contracts		3.5		—		—		3.5

Total	$	473.5	$	470.0	$	—	$	3.5


	Fair Value Measurements at March 31, 2008
				Quoted Prices in		Significant
				Active Markets		Other		Significant
				for Identical		Observable		Unobservable
				Liabilities		Inputs		Inputs
Liabilities	Total			(Level 1)		(Level 2)		(Level 3)
	($ in millions)
Hedging contracts		($27.2	)	$	—	$	—		($27.2	)

Total		($27.2	)	$	—	$	—		($27.2	)

The table below presents a reconciliation for assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the first quarter of 2008.


	Hedging
	Contracts, net
	($ in millions)
Balance as of January 1, 2008		($16.8	)
Total gains or losses (realized or unrealized)
Included in earnings		0.3
Included in other comprehensive income		(11.5	)
Purchases, issuances and settlements		4.3
Transfers in and out of Level 3		—

Balance as of March 31, 2008		($23.7	)


The amount of total (gains)/losses for the period included in earnings attributable to the change in unrealized (gains)/ losses relating to derivatives still held at March 31, 2008	$	0.3

In February 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 became effective for us on January 1, 2008. We did not elect the fair value option for any of our existing financial instruments other than those mandated by other FASB standards and accordingly the impact of the adoption of SFAS No. 159 on our financial statements was immaterial. We have not determined whether or not we will elect this option for financial instruments we may acquire in the future.

Note 10 — Subsequent Event

On April 30, 2008 we announced that we had entered into a definitive merger agreement to acquire Bois d’Arc Energy, Inc. (“Bois d’Arc”). Under the terms of the merger agreement, Bois d’Arc stockholders will receive $13.65 in cash and 0.165 shares of Stone common stock for each share of Bois d’Arc common stock. The transaction is subject to stockholder approval of both companies, regulatory approvals, and other customary conditions.

Stone expects to fund the transaction utilizing existing cash on its balance sheet, approximately $500 million to $600 million of borrowings from a proposed amended and restated $700 million credit facility, and the issuance of approximately 11.3 million shares of Stone common stock. The companies anticipate completing the transaction in the third quarter of 2008. Post closing, it is anticipated that the Stone stockholders will own approximately 72% of the combined company, and the Bois d’Arc stockholders will own approximately 28% of the combined company.

Note 11 — Commitments and Contingencies

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. Also, on January 2, 2008, Stone was served with a petition (civil action number 2007-6754) claiming $1.5 million of additional franchise taxes due for the 2004 franchise year, plus accrued interest of $800,000 calculated through November 30, 2007. These assessments all relate to the LDR’s assertion that sales of crude oil and natural gas from properties located on the Outer Continental Shelf, which are transported through the state of Louisiana, should be sourced to the state of Louisiana for purposes of computing the Louisiana franchise tax apportionment ratio. The Company disagrees with these contentions and intends to vigorously defend itself against these claims. The franchise tax years 2005, 2006 and 2007 remain subject to examination.

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

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

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

On October 1, 2007, the Federal Court issued an Order directing that judgment on the Motions to Dismiss be entered in accordance with the recommendations of the Report. On October 23, 2007, Stone and the individual defendants filed a motion seeking permission to appeal the denial of the Motions to Dismiss to the Fifth Circuit Court of Appeals, which motion was denied. The discovery process is now underway. The parties have exchanged initial disclosures, document requests and interrogatories and have begun producing documents. Lead Plaintiff will have until May 12, 2008 to file a motion to certify the Securities Action as a class action under Rule 23 of the Federal Rules of Civil Procedure (“Class Certification Motion”). A schedule for the Company’s opposition to and a hearing on the Class Certification Motion will be set by the Federal Court. The parties have also agreed to a Joint Plan of Work and Proposed Scheduling Order, which provides deadlines for additional pre-trial proceedings, including discovery, expert reports, and dispositive motions.

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 Exploration and Production Company (“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 Energy Partners, Ltd. (“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 then-pending motion to dismiss the Securities Action after which time a hearing was to be conducted by the Federal Court to determine the propriety of maintaining that stay. As of the date hereof, the Federal Court has yet to consider any potential modification of the stay.

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.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

TO THE STOCKHOLDERS OF
STONE ENERGY CORPORATION:

We have reviewed the condensed consolidated balance sheet of Stone Energy Corporation as of March 31, 2008, and the related condensed consolidated statements of operations and cash flows for the three-month periods ended March 31, 2008 and 2007. These financial statements are the responsibility of the Company’s management.

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

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

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


		/s/ Ernst & Young LLP

New Orleans, Louisiana
May 6, 2008

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

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

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

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) contained in this Form 10-Q should be read in conjunction with the MD&A contained in our Annual Report on Form 10-K for the year ended December 31, 2007.

Overview

Stone Energy Corporation is an independent oil and gas company engaged in the acquisition, exploration, exploitation, development and operation of oil and gas properties located primarily in the Gulf of Mexico. Prior to June 29, 2007, we also had significant operations in the Rocky Mountain Region. We are also engaged in an exploratory joint venture in Bohai Bay, China. Our business strategy is to increase reserves, production and cash flow through the acquisition, exploitation and development of mature properties in the Gulf Coast Basin and exploring opportunities in the deep water environment of the Gulf of Mexico, Rocky Mountain Region, Appalachia, Bohai Bay, China and other potential areas. Throughout this document, reference to our “Gulf Coast Basin” properties includes our onshore, shelf, deep shelf and deep water properties. Reference to our “Rocky Mountain Region” includes our properties in several Rocky Mountain Basins and the Williston Basin.

On June 29, 2007, we completed the sale of substantially all of our Rocky Mountain Region properties and related assets to Newfield Exploration Company in two separate transactions for a total cash consideration of $582 million. At December 31, 2006, the estimated proved reserves associated with these assets totaled 182.4 billion cubic feet of gas equivalent (Bcfe), which represented 31% of our estimated proved oil and natural gas reserves. The divested properties included our interests in the Pinedale Anticline, the Jonah field, the Williston Basin, the Scott field and several smaller producing areas. The sale also included net undeveloped acreage of approximately 550,000 acres. We maintained a 35% proportional working interest in several undeveloped plays in the Rocky Mountain Region totaling approximately 60,000 acres.

Pending Merger. On April 30, 2008 we announced that we had entered into a definitive merger agreement to acquire Bois d’Arc Energy, Inc. Under the terms of the merger agreement, Bois d’Arc stockholders will receive $13.65 in cash and 0.165 shares of Stone common stock for each share of Bois d’Arc common stock. The transaction is subject to stockholder approval of both companies, regulatory approvals, and other customary conditions.

Critical Accounting Policies

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

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

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

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

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

	•		the effectiveness and estimated fair value of derivative positions;

	•		classification of unevaluated property costs;

	•		capitalized general and administrative costs and interest;

	•		insurance recoveries related to hurricanes;

	•		current income taxes; and

	•		contingencies.

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

Other Factors Affecting Our Business and Financial Results

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

Known Trends and Uncertainties

International Operations. Included in unevaluated oil and gas property costs at March 31, 2008 are $30.3 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. In 2007 this investment was deemed to be impaired in the amount of $8.2 million. Given that this is our sole investment in the Peoples Republic of China, it is possible that future evaluations of this project could result in additional impairment charges to income on our income statement.

Liquidity and Capital Resources

Cash Flow and Working Capital. Net cash flow provided by operating activities totaled $112.3 million during the three months ended March 31, 2008 compared to $109.7 million generated in the comparable period in 2007. Based on our outlook of commodity prices and our estimated production, we expect to fund our 2008 capital expenditures with cash flow provided by operating activities.

Net cash flow used in investing activities totaled $75.0 million during the first quarter 2008, which primarily represents our investment in oil and natural gas properties offset by proceeds from the sale of oil and gas properties. Net cash flow used in investing activities totaled $83.7 million during the first quarter of 2007, which primarily represents our investment in oil and gas properties.

Net cash flow provided by financing activities totaled $4.6 million for the quarter ended March 31, 2008, which primarily represents proceeds from the exercise of stock options and vesting of restricted stock. Net cash flow used in financing activities totaled $19.6 million for the quarter ended March 31, 2007, which primarily represents repayments of borrowings under our bank credit facility net of proceeds from the exercise of stock options and vesting of restricted stock.

We had working capital at March 31, 2008 of $463.8 million. A substantial portion of this working capital was generated from the sale of our Rocky Mountain Region properties on June 29, 2007. 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”.

Capital Expenditures. First quarter 2008 additions to oil and gas property costs of $99.3 million included $21.7 million of acquisition costs, $5.1 million of capitalized salaries, general and administrative expenses (inclusive of incentive compensation) and $4.0 million of capitalized interest. These investments were financed by cash flow from operating activities.

Our 2008 capital expenditures budget (without consideration of the pending merger transaction), which excludes acquisitions, asset retirement costs and capitalized interest and salaries, general and administrative expenses, is approximately $395 million. To the extent that 2008 cash flow from operating activities exceeds our estimated 2008 capital expenditures, we may repurchase shares of common stock or invest in the money markets pending the proposed merger or future acquisitions. If cash flow from operating

activities during 2008 is not sufficient to fund estimated 2008 capital expenditures, we believe that our bank credit facility will provide us with adequate liquidity. See “Bank Credit Facility.”

Bank Credit Facility. At March 31, 2008, we had no outstanding borrowings under our bank credit facility and letters of credit totaling $52.8 million had been issued under the facility. On November 1, 2007, we entered into a $300 million senior secured credit facility, maturing on July 1, 2011, with a syndicated bank group. The new facility has an initial borrowing base of $175 million and replaces the previous $500 million credit facility. As of May 2, 2008, after accounting for the $52.8 million of letters of credit, we had $122.2 million of borrowings available under the new credit facility. 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.

Share Repurchase Program. On September 24, 2007, our Board of Directors authorized a share repurchase program for an aggregate amount of up to $100 million. The shares may be repurchased from time to time in the open market or through privately negotiated transactions. The repurchase program is subject to business and market conditions, and may be suspended or discontinued at any time. Through March 31, 2008 no shares had been repurchased under this program.

Results of Operations

The following table sets forth certain information with respect to our oil and gas operations.


	Three Months Ended
	March 31,
	2008		2007		Variance			% Change
Production:
Oil (MBbls)		1,282		1,652		(370	)		(22	%)
Natural gas (MMcf)		9,133		11,474		(2,341	)		(20	%)
Oil and natural gas (MMcfe)		16,825		21,386		(4,561	)		(21	%)
Revenue data (in thousands) (a):
Oil revenue	$	122,707	$	93,584	$	29,123			31	%
Natural gas revenue		80,526		79,749		777			1	%

Total oil and natural gas revenue	$	203,233	$	173,333	$	29,900			17	%
Average prices (a):
Oil (per Bbl)	$	95.72	$	56.65	$	39.07			69	%
Natural gas (per Mcf)		8.82		6.95		1.87			27	%
Oil and natural gas (per Mcfe)		12.08		8.11		3.97			49	%
Expenses (per Mcfe):
Lease operating expenses	$	1.80	$	2.39		($0.59	)		(25	%)
Salaries, general and administrative expenses (b)		0.61		0.39		0.22			56	%
DD&A expense on oil and gas properties		3.73		3.64		0.09			2	%


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

(b)		Exclusive of incentive compensation expense.

During the first quarter of 2008, net income totaled $62.2 million, or $2.22 per share, compared to $10.5 million, or $0.38 per share for the first quarter of 2007. All per share amounts are on a diluted basis. The variance in quarterly results was also due to the following components:

Production. During the first quarter of 2008, total production volumes decreased 21% to 16.8 Bcfe compared to 21.4 Bcfe produced during the first quarter of 2007. Oil production during the first quarter of 2008 totaled approximately 1,282,000 barrels compared to 1,652,000 barrels produced during the first quarter of 2007, while natural gas production totaled 9.1 Bcf during the first quarter of 2008 compared to 11.5 Bcf produced during the first quarter of 2007. Production rates were negatively impacted during the first quarter of 2007 by extended Gulf Coast shut-ins due to Hurricanes Katrina and Rita, amounting to volumes of approximately 1.3 Bcfe (14.4 MMcfe per day). Without the effects of hurricane production deferrals, quarter to quarter total production volumes decreased approximately 5.9 Bcfe. The decrease was primarily the result of the sale of substantially all of our Rocky Mountain Region properties on June 29, 2007 and the divestiture of non-core Gulf of Mexico properties in the first quarter of 2008. Rocky Mountain Region production was 3.7 Bcfe for the quarter ended March 31, 2007.

Prices. Prices realized during the first quarter of 2008 averaged $95.72 per Bbl of oil and $8.82 per Mcf of natural gas, or 49% higher, on an Mcfe basis, than first quarter 2007 average realized prices of $56.65 per Bbl of oil and $6.95 per Mcf of natural gas. All unit pricing amounts include the cash settlement of effective hedging contracts.

We enter into various hedging contracts in order to reduce our exposure to the possibility of declining oil and gas prices. Our effective hedging transactions increased our average realized natural gas prices by $0.09 per Mcf in each of the quarters ended March 31, 2008 and 2007. Average realized oil prices were decreased during the quarter ended March 31, 2008 by $4.06 per barrel. During the first quarter of 2007, our effective hedging transactions increased our average realized oil prices by $0.66 per Bbl.

Income. First quarter 2008 oil and natural gas revenue totaled $203.2 million, compared to first quarter 2007 oil and natural gas revenue of $173.3 million. The increase is attributable to a 49% increase in average realized prices on a gas equivalent basis, partially offset by a 21% decrease in production volumes. Rocky Mountain Region first quarter 2007 oil and natural gas revenue amounted to $25.1 million.

Interest income totaled $4.9 million during the first quarter of 2008 compared to $0.6 million during the comparable quarter of 2007. The increase in interest income is the result of an increase in our cash balances during the period after the sale of substantially all of our Rocky Mountain Region properties in June 2007.

Expenses. Lease operating expenses during the first quarter of 2008 totaled $30.3 million compared to $51.1 million for the first quarter of 2007. On a unit of production basis, first quarter 2008 lease operating expenses were $1.80 per Mcfe as compared to $2.39 per Mcfe for the comparable quarter of 2007. The decrease in lease operating expenses in the first quarter of 2008 compared to 2007 was the result of decreased major maintenance activity, the sale of substantially all of our Rocky Mountain Region properties in June 2007, and operational efficiencies. In addition, the first quarter of 2007 included the drilling of a $9.9 million expensed replacement well. Rocky Mountain Region lease operating expenses during the first quarter of 2007 totaled $4.8 million.

Depreciation, depletion and amortization (“DD&A”) on oil and gas properties for the first quarter of 2008 totaled $62.7 million, or $3.73 per Mcfe, compared to $77.8 million, or $3.64 per Mcfe, for the first quarter of 2007.

Salaries, general and administrative (SG&A) expenses (exclusive of incentive compensation) for the first quarter of 2008 were $10.3 million compared to $8.2 million in the first quarter of 2007. The increase in SG&A is primarily due to additional compensation expense associated with restricted stock issuances and higher legal and consulting fees. First quarter 2007 SG&A expense for the Denver district, which related to the Rocky Mountain Region, was $0.7 million.

During the first quarter of 2008 and 2007, certain of our derivative contracts were determined to be partially ineffective because of differences in the relationship between the fixed price in the derivative contract and actual prices realized. Derivative expense for the quarter ended March 31, 2008 and 2007, totaled $0.3 million and $0.5 million, respectively, representing changes in the fair market value of the ineffective portion of the derivatives.

Interest expense for the first quarter of 2008 totaled $3.9 million, net of $4.0 million of capitalized interest, compared to interest expense of $11.2 million, net of $4.3 million of capitalized interest, during the first quarter of 2007. First quarter 2007 interest expense included interest on our senior floating rate notes issued in June 2006 and interest on our bank credit facility. The senior floating rate notes were redeemed in full in August 2007 and we had no outstanding borrowings under our bank credit facility during the first quarter of 2008.

Production taxes during the first quarter of 2008 totaled $1.4 million compared to $3.9 million in the first quarter of 2007. The decrease in production taxes resulted from the sale of substantially all of our Rocky Mountain Region properties in June 2007. First quarter 2007 Rocky Mountain Region production taxes totaled $2.7 million.

We estimate that we have incurred $14.0 million of current federal income tax expense for the first quarter of 2008, all of which is unpaid through March 31, 2008.

Recent Accounting Developments

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

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

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

Defined Terms

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Commodity Price Risk

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

Our hedging policy provides that not more than 50% of our estimated production quantities can be hedged without the consent of the board of directors. We believe our current hedging positions have hedged approximately 40% — 45% of our estimated 2008 production and 30% — 40% of our estimated 2009 production without consideration of our pending merger transaction. See Item 1. Financial Statements – Note 4 – Hedging Activities for a detailed discussion of hedges in place to manage our exposure to oil and natural gas price declines.

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

Interest Rate Risk

We had long-term debt outstanding of $400 million at March 31, 2008, all of which 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. We had no outstanding borrowings under our bank credit facility, which bears interest at a variable rate, at March 31, 2008.

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

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

Our chief executive officer and our chief financial officer, with the participation of other members of our senior management, reviewed and evaluated the effectiveness of Stone’s disclosure controls and procedures as of the end of the quarterly period ended March 31, 2008. Based on this evaluation, our chief executive officer and chief financial officer believe:

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

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

Changes in Internal Controls Over Financial Reporting

There has not been any change in our internal control over financial reporting that occurred during our quarterly period ended March 31, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

On October 1, 2007, the Federal Court issued an Order directing that judgment on the Motions to Dismiss be entered in accordance with the recommendations of the Report. On October 23, 2007, Stone and the individual defendants filed a motion seeking permission to appeal the denial of the Motions to Dismiss to the Fifth Circuit Court of Appeals, which motion was denied. The discovery process is now underway. The parties have exchanged initial disclosures, document requests, and interrogatories and have begun producing documents. Lead Plaintiff will have until May 12, 2008 to file a motion to certify the Securities Action as a class action under Rule 23 of the Federal Rules of Civil Procedure (“Class Certification Motion”). A schedule for the Company’s opposition to and a hearing on the Class Certification Motion will be set by the Federal Court. The parties have also agreed to a Joint Plan of Work and Proposed Scheduling Order, which provides deadlines for additional pre-trial proceedings, including discovery, expert reports, and dispositive motions.

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.

Item 1A. Risk Factors

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

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

As of May 2, 2008, we had $400 million in outstanding indebtedness. We have a borrowing base under our current bank credit facility of $175 million with availability of an additional $122.2 million of borrowings as of May 2, 2008. In addition, we will incur substantial additional indebtedness if we get stockholder and regulatory approval of our merger with Bois d’Arc Energy. In connection with the Bois d’Arc merger, we expect to amend and restate our current bank credit facility to increase the borrowing base thereunder to $700 million in order to fund a part of the cash portion of the merger consideration. We expect to borrow approximately $500 million to $600 million under the amended and restated bank credit facility for this purpose.

The terms of the current agreements governing our debt impose, and the terms of our future debt agreements, including the amended and restated credit facility that we will enter into in connection with the Bois d’Arc merger will impose, significant restrictions on our ability to take a number of actions that we may otherwise desire to take, including:

	•		incurring additional debt;

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

	•		making investments;

	•		creating liens on our assets;

	•		selling assets;

	•		guaranteeing other indebtedness;

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

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

	•		entering into transactions with affiliates.

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

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

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

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

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

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

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

	•		making us vulnerable to increases in interest rates, because debt under our credit facility 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 our bank credit facility, which is re-determined periodically, is based on an amount established by the bank group after its evaluation of our proved oil and gas reserve values. Upon a 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.

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

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

On September 24, 2007, our Board of Directors authorized a share repurchase program for an aggregate amount of up to $100 million. Through March 31, 2008 no shares had been repurchased under this program; however, shares were withheld from certain employees to pay taxes associated with the employees’ vesting of restricted stock. The following table sets forth information regarding our repurchases or acquisitions of common stock during the first quarter of 2008:


						Total Number of		Maximum Number (or
						Shares (or Units)		Approximate Dollar Value)
	Total Number			Average		Purchased as Part		of Shares (or Units) that
	of Shares (or			Price Paid		of Publicly		May Yet be Purchased
	Units)			per Share		Announced Plans		Under the Plans or
Period	Purchased			(or Unit)		or Programs		Programs
Share Repurchase Program:
January 2008		—		$	—		—
February 2008		—			—		—
March 2008		—			—		—

		—			—		—	$	100,000,000

Other:
January 2008		7,894	(a)		45.58		—
February 2008		9,894	(a)		41.45		—
March 2008		—			—		—

		17,788			43.28		—		N/A

Total		17,788		$	43.28		—


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

Item 6. Exhibits

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

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

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

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

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

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

	*15.1 –		Letter from Ernst & Young LLP dated May 6, 2008, regarding unaudited interim financial information.

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

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

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


	*		Filed herewith

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

EXHIBIT INDEX

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

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

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

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

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

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

*15.1	–	Letter from Ernst & Young LLP dated May 6, 2008, regarding unaudited interim financial information.

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

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

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


*		Filed herewith

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


	STONE ENERGY CORPORATION

Date: May 6, 2008	By:	/s/ J. Kent Pierret

		J. Kent Pierret
		Senior Vice President,
		Chief Accounting Officer and Treasurer
		(On behalf of the Registrant and as Chief Accounting Officer)

	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



	/s/ David H. Welch
May 6, 2008	David H. Welch
	President and Chief Executive Officer

	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



	/s/ Kenneth H. Beer
May 6, 2008	Kenneth H. Beer
	Senior Vice President and Chief Financial Officer

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		Page
PART I — FINANCIAL INFORMATION

Item 1.	Financial Statements:

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

	Condensed Consolidated Statement of Operations for the Three Months Ended March 31, 2008 and 2007		2

	Condensed Consolidated Statement of Cash Flows for the Three Months Ended March 31, 2008 and 2007		3

	Notes to Condensed Consolidated Financial Statements		4

	Report of Independent Registered Public Accounting Firm		10

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		11

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		15

Item 4.	Controls and Procedures		15

PART II — OTHER INFORMATION

Item 1.	Legal Proceedings		16

Item 1A.	Risk Factors		17

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		19

Item 6.	Exhibits		20

	Signature		21
Letter from Ernst & Young LLP
Certification of PEO Pursuant to Rule 13a-14(a)
Certification of PFO Pursuant to Rule 13a-14(a)
Certification of PEO and PFO Pursuant to Section 1350

	1.		I have reviewed this Quarterly Report on Form 10-Q 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)		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.

			(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.


	Very truly yours,
	/s/Ernst & Young LLP