Guarantor Financial Statements

3 Months Ended

Mar. 31, 2013

Guarantor Financial Statements

Note 9 – Guarantor Financial Statements

Stone Offshore is an unconditional guarantor (the “Guarantor Subsidiary”) of our 2017 Convertible Notes, our 2017 Notes and our 2022 Notes. Our other subsidiaries (the “Non-Guarantor Subsidiaries”) did not provide guarantees. We have two subsidiaries that do not own any assets at this time. One of our other non-guarantor subsidiaries was merged into Stone Offshore on September 6, 2012. The following presents unaudited condensed consolidating financial information as of March 31, 2013 and December 31, 2012 and for the three-month periods ended March 31, 2013 and 2012 on an issuer (parent company), guarantor subsidiary, non-guarantor subsidiaries and consolidated basis. Elimination entries presented are necessary to combine the entities.

CONDENSED CONSOLIDATING BALANCE SHEET

MARCH 31, 2013

(In thousands)

	Parent			Guarantor Subsidiary			Non-Guarantor Subsidiaries		Eliminations			Consolidated
Assets
Current assets:
Cash and cash equivalents	$	210,189		$	51,164		$	—	$	—		$	261,353
Accounts receivable		48,545			221,703			—		(122,912	)		147,336
Fair value of hedging contracts		—			18,712			—		—			18,712
Current income tax receivable		19,533			—			—		—			19,533
Deferred taxes *		3,387			19,967			—		—			23,354
Inventory		3,744			283			—		—			4,027
Other current assets		3,587			—			—		—			3,587
Total current assets		288,985			311,829			—		(122,912	)		477,902
Oil and gas properties, full cost method:
Proved		1,078,367			6,280,003			—		—			7,358,370
Less: accumulated DD&A		(379,399	)		(5,205,299	)		—		—			(5,584,698	)
Net proved oil and gas properties		698,968			1,074,704			—		—			1,773,672
Unevaluated		270,373			201,084			—		—			471,457
Other property and equipment, net		22,059			—			—		—			22,059
Fair value of hedging contracts		—			6,792			—		—			6,792
Other assets, net		48,951			1,561			—		—			50,512
Investment in subsidiary		774,817			—			—		(774,817	)		—
Total assets	$	2,104,153		$	1,595,970		$	—	($	897,729	)	$	2,802,394
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable to vendors	$	182,210		$	22,193		$	—	($	122,912	)	$	81,491
Undistributed oil and gas proceeds		16,580			12,324			—		—			28,904
Accrued interest		15,351			—			—		—			15,351
Fair value of hedging contracts		—			5,376			—		—			5,376
Asset retirement obligations		—			68,978			—		—			68,978
Other current liabilities		5,522			318			—		—			5,840
Total current liabilities		219,663			109,189			—		(122,912	)		205,940
Long-term debt		917,267			—			—		—			917,267
Deferred taxes *		40,988			295,120			—		—			336,108
Asset retirement obligations		5,572			407,134			—		—			412,706
Fair value of hedging contracts		—			2,997			—		—			2,997
Other long-term liabilities		27,140			6,713			—		—			33,853
Total liabilities		1,210,630			821,153			—		(122,912	)		1,908,871
Commitments and contingencies Stockholders’ equity:
Common stock		487			—			—		—			487
Treasury stock		(860	)		—			—		—			(860	)
Additional paid-in capital		1,385,445			1,496,509			—		(1,496,509	)		1,385,445
Accumulated deficit		(502,041	)		(732,184	)		—		732,184			(502,041	)
Accumulated other comprehensive income		10,492			10,492			—		(10,492	)		10,492
Total stockholders’ equity		893,523			774,817			—		(774,817	)		893,523
Total liabilities and stockholders’ equity	$	2,104,153		$	1,595,970		$	—	($	897,729	)	$	2,802,394

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

CONDENSED CONSOLIDATING BALANCE SHEET

DECEMBER 31, 2012

(In thousands)

	Parent			Guarantor Subsidiary			Non-Guarantor Subsidiaries		Eliminations			Consolidated
Assets
Current assets:
Cash and cash equivalents	$	228,398		$	51,128		$	—	$	—		$	279,526
Accounts receivable		59,213			108,075			—		—			167,288
Fair value of hedging contracts		—			39,655			—		—			39,655
Current income tax receivable		10,027			—			—		—			10,027
Deferred taxes *		5,947			9,567			—		—			15,514
Inventory		3,924			283			—		—			4,207
Other current assets		3,626			—			—		—			3,626
Total current assets		311,135			208,708			—		—			519,843
Oil and gas properties, full cost method:
Proved		1,004,808			6,239,658			—		—			7,244,466
Less: accumulated DD&A		(370,111	)		(5,140,055	)		—		—			(5,510,166	)
Net proved oil and gas properties		634,697			1,099,603			—		—			1,734,300
Unevaluated		254,757			193,038			—		—			447,795
Other property and equipment, net		22,115			—			—		—			22,115
Fair value of hedging contracts		—			9,199			—		—			9,199
Other assets, net		41,679			1,500			—		—			43,179
Investment in subsidiary		736,331			—			—		(736,331	)		—
Total assets	$	2,000,714		$	1,512,048		$	—	($	736,331	)	$	2,776,431
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable to vendors	$	74,503		$	19,858		$	—	$	—		$	94,361
Undistributed oil and gas proceeds		21,841			1,573			—		—			23,414
Accrued interest		18,546			—			—		—			18,546
Fair value of hedging contracts		—			149			—		—			149
Asset retirement obligations		—			66,260			—		—			66,260
Other current liabilities		16,765			—			—		—			16,765
Total current liabilities		131,655			87,840			—		—			219,495
Long-term debt		914,126			—			—		—			914,126
Deferred taxes *		47,758			263,072			—		—			310,830
Asset retirement obligations		5,479			416,563			—		—			422,042
Fair value of hedging contracts		—			1,530			—		—			1,530
Other long-term liabilities		29,563			6,712			—		—			36,275
Total liabilities		1,128,581			775,717			—		—			1,904,298
Commitments and contingencies Stockholders’ equity:
Common stock		484			—			—		—			484
Treasury stock		(860	)		—			—		—			(860	)
Additional paid-in capital		1,386,475			1,496,510			—		(1,496,510	)		1,386,475
Accumulated deficit		(542,799	)		(789,012	)		—		789,012			(542,799	)
Accumulated other comprehensive income		28,833			28,833			—		(28,833	)		28,833
Total stockholders’ equity		872,133			736,331			—		(736,331	)		872,133
Total liabilities and stockholders’ equity	$	2,000,714		$	1,512,048		$	—	($	736,331	)	$	2,776,431

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

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 2013

(In thousands)

	Parent			Guarantor Subsidiary			Non- Guarantor Subsidiaries		Eliminations			Consolidated
Operating revenue:
Oil production	$	5,343		$	181,582		$	—	$	—		$	186,925
Gas production		7,198			29,624			—		—			36,822
Natural gas liquids production		2,299			6,879			—		—			9,178
Other operational income		649			158			—		—			807
Total operating revenue		15,489			218,243			—		—			233,732
Operating expenses:
Lease operating expenses		2,291			50,753			—		—			53,044
Transportation, processing and gathering expenses		2,052			3,345			—		—			5,397
Production taxes		867			1,222			—		—			2,089
Depreciation, depletion, amortization		10,191			65,244			—		—			75,435
Accretion expense		93			8,170			—		—			8,263
Salaries, general and administrative		13,948			4			—		—			13,952
Incentive compensation expense		1,431			—			—		—			1,431
Derivative expense, net		—			1,221			—		—			1,221
Other operational expenses		50			22			—		—			72
Total operating expenses		30,923			129,981			—		—			160,904
Income (loss) from operations		(15,434	)		88,262			—		—			72,828
Other (income) expenses:
Interest expense		9,627			8			—		—			9,635
Interest income		(80	)		(37	)		—		—			(117	)
Other income		(224	)		(502	)		—		—			(726	)
Income from investment in subsidiaries		(56,828	)		—			—		56,828			—
Total other (income) expenses		(47,505	)		(531	)		—		56,828			8,792
Income before taxes		32,071			88,793			—		(56,828	)		64,036
Provision (benefit) for income taxes:
Current		(3,746	)		—			—		—			(3,746	)
Deferred		(4,941	)		31,965			—		—			27,024
Total income taxes		(8,687	)		31,965			—		—			23,278
Net income	$	40,758		$	56,828		$	—	($	56,828	)	$	40,758
Comprehensive income	$	22,417		$	56,828		$	—	($	56,828	)	$	22,417

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 2012

(In thousands)

	Parent			Guarantor Subsidiary			Non- Guarantor Subsidiaries			Eliminations			Consolidated
Operating revenue:
Oil production	$	6,234		$	195,524		$	—		$	—		$	201,758
Gas production		5,631			23,226			—			—			28,857
Natural gas liquids production		3,864			9,588			—			—			13,452
Other operational income		694			63			133			—			890
Total operating revenue		16,423			228,401			133			—			244,957
Operating expenses:
Lease operating expenses		4,904			39,387			189			—			44,480
Transportation, processing and gathering expenses		2,488			1,169			—			—			3,657
Production taxes		1,163			2,215			—			—			3,378
Depreciation, depletion, amortization		11,477			73,000			98			—			84,575
Accretion expense		148			8,032			86			—			8,266
Salaries, general and administrative		12,654			1,051			—			—			13,705
Incentive compensation expense		1,442			—			—			—			1,442
Derivative expense, net		—			485			—			—			485
Other operational expenses		42			—			—						42
Total operating expenses		34,318			125,339			373			—			160,030
Income (loss) from operations		(17,895	)		103,062			(240	)		—			84,927
Other (income) expenses:
Interest expense		5,846			(115	)		—			—			5,731
Interest income		(30	)		(1	)		—			—			(31	)
Other income		(19	)		(401	)		—			—			(420	)
(Income) loss from investment in subsidiaries		(66,137	)		239			—			65,898			—
Total other (income) expenses		(60,340	)		(278	)		—			65,898			5,280
Income (loss) before taxes		42,445			103,340			(240	)		(65,898	)		79,647
Provision (benefit) for income taxes:
Current		1,234			—			—			—			1,234
Deferred		(9,763	)		37,202			—			—			27,439
Total income taxes		(8,529	)		37,202			—			—			28,673
Net income (loss)	$	50,974		$	66,138		($	240	)	($	65,898	)	$	50,974
Comprehensive income (loss)	$	28,909		$	66,138		($	240	)	($	65,898	)	$	28,909

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

THREE MONTHS ENDED MARCH 31, 2013

(In thousands)

	Parent			Guarantor Subsidiary			Non-Guarantor Subsidiaries		Eliminations			Consolidated
Cash flows from operating activities:
Net income	$	40,758		$	56,828		$	—	($	56,828	)	$	40,758
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, depletion and amortization		10,191			65,244			—		—			75,435
Accretion expense		93			8,170			—		—			8,263
Deferred income tax provision (benefit)		(4,941	)		31,965			—		—			27,024
Settlement of asset retirement obligations		—			(14,880	)		—		—			(14,880	)
Non-cash stock compensation expense		2,296			—			—		—			2,296
Excess tax benefits		(104	)		—			—		—			(104	)
Non-cash derivative expense		—			1,385			—		—			1,385
Non-cash interest expense		4,041			—			—		—			4,041
Non-cash income from investment in subsidiaries		(56,828	)		—					56,828			—
Change in current income taxes		(9,402	)		—			—		—			(9,402	)
Change in intercompany receivables/payables		122,912			(122,912	)		—		—			—
Decrease in accounts receivable		10,668			9,284			—		—			19,952
Decrease in other current assets		40			—			—		—			40
Decrease in inventory		158			—			—		—			158
Increase (decrease) in accounts payable		(1,890	)		3,894			—		—			2,004
Increase (decrease) in other current liabilities		(20,011	)		11,069			—		—			(8,942	)
Other		(761	)		(501	)		—		—			(1,262	)
Net cash provided by operating activities		97,220			49,546			—		—			146,766
Cash flows from investing activities:
Investment in oil and gas properties		(111,458	)		(49,510	)		—		—			(160,968	)
Investment in fixed and other assets		(599	)		—			—		—			(599	)
Net cash used in investing activities		(112,057	)		(49,510	)		—		—			(161,567	)
Cash flows from financing activities:
Deferred financing costs		(11	)		—			—		—			(11	)
Excess tax benefits		104			—			—		—			104
Net payments for share based compensation		(3,465	)		—			—		—			(3,465	)
Net cash used in financing activities		(3,372	)		—			—		—			(3,372	)
Net change in cash and cash equivalents		(18,209	)		36			—		—			(18,173	)
Cash and cash equivalents, beginning of period		228,398			51,128			—		—			279,526
Cash and cash equivalents, end of period	$	210,189		$	51,164		$	—	$	—		$	261,353

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

THREE MONTHS ENDED MARCH 31, 2012

(In thousands)

	Parent			Guarantor Subsidiary			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Cash flows from operating activities:
Net income (loss)	$	50,974		$	66,138		($	240	)	($	65,898	)	$	50,974
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation, depletion and amortization		11,477			73,000			98			—			84,575
Accretion expense		148			8,032			86			—			8,266
Deferred income tax provision (benefit)		(9,763	)		37,202			—			—			27,439
Settlement of asset retirement obligations		—			(2,980	)		—			—			(2,980	)
Non-cash stock compensation expense		1,750			—			—			—			1,750
Excess tax benefits		(847	)		—			—			—			(847	)
Non-cash derivative expense		—			1,342									1,342
Non-cash interest expense		1,573			—			—			—			1,573
Non-cash income from investment in subsidiaries		(65,737	)		(161	)		—			65,898			—
Change in current income taxes		(2,647	)		—			—			—			(2,647	)
Change in intercompany receivables/payables		18,655			(18,445	)		(210	)		—			—
(Increase) decrease in accounts receivable		(983	)		(21,226	)		98			—			(22,111	)
Decrease in other current assets		35			—			—			—			35
Increase (decrease) in accounts payable		(25	)		(6,157	)		167			—			(6,015	)
Increase (decrease) in other current liabilities		(23,155	)		987			—			—			(22,168	)
Other		(254	)		—			—			—			(254	)
Net cash provided by (used in) operating activities		(18,799	)		137,732			(1	)		—			118,932
Cash flows from investing activities:
Investment in oil and gas properties		(8,767	)		(97,703	)		1			—			(106,469	)
Proceeds from sale of oil and gas properties, net of expenses		403			—			—			—			403
Sale of fixed assets		134			—			—			—			134
Investment in fixed and other assets		(909	)		—			—			—			(909	)
Net cash (used in) provided by investing activities		(9,139	)		(97,703	)		1			—			(106,841	)
Cash flows from financing activities:
Proceeds from bank borrowings		25,000			—			—			—			25,000
Repayments of bank borrowings		(70,000	)		—			—			—			(70,000	)
Proceeds from issuance of senior convertible notes		300,000			—			—			—			300,000
Deferred financing costs of senior convertible notes		(8,855	)		—			—			—			(8,855	)
Proceeds from Sold Warrants		40,170			—			—			—			40,170
Payments for Purchased Call Options		(70,830	)		—			—			—			(70,830	)
Excess tax benefits		847			—			—			—			847
Net payments for share based compensation		(3,033	)		—			—			—			(3,033	)
Net cash provided by financing activities		213,299			—			—			—			213,299
Net change in cash and cash equivalents		185,361			40,029			—			—			225,390
Cash and cash equivalents, beginning of period		37,389			926			136			—			38,451
Cash and cash equivalents, end of period	$	222,750		$	40,955		$	136		$	—		$	263,841