Note 11 – Guarantor Financial Statements

Stone Offshore is an unconditional guarantor (the “Guarantor Subsidiary”) of the 2017 Convertible Notes and the 2022 Notes. Our other subsidiaries (the “Non-Guarantor Subsidiaries”) have not provided guarantees. The following presents unaudited condensed consolidating financial information as of March 31, 2015 and December 31, 2014 and for the three month periods ended March 31, 2015 and 2014 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, 2015

(In thousands)


	Parent			Guarantor Subsidiary			Non- Guarantor Subsidiaries			Eliminations			Consolidated
Assets
Current assets:
Cash and cash equivalents	$	131,936		$	30,015		$	177		$	—		$	162,128
Accounts receivable		102,556			42,014			30			(32,450	)		112,150
Fair value of derivative contracts		—			124,192			—			—			124,192
Current income tax receivable		24			—			—			—			24
Inventory		3,426			283			—			—			3,709
Other current assets		6,230			—			4			—			6,234

Total current assets		244,172			196,504			211			(32,450	)		408,437
Oil and gas properties, full cost method:
Proved		1,716,567			7,171,265			—			—			8,887,832
Less: accumulated DD&A		(1,502,385	)		(6,043,837	)		—			—			(7,546,222	)

Net proved oil and gas properties		214,182			1,127,428			—			—			1,341,610
Unevaluated		297,075			261,172			44,220			—			602,467
Other property and equipment, net		31,828			—			—			—			31,828
Fair value of derivative contracts		—			13,966			—			—			13,966
Other assets, net		21,692			1,080			1,900			—			24,672
Investment in subsidiary		1,068,365			—			46,161			(1,114,526	)		—

Total assets	$	1,877,314		$	1,600,150		$	92,492		($	1,146,976	)	$	2,422,980

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable to vendors	$	30,986		$	61,410		$	8,200		($	32,450	)	$	68,146
Undistributed oil and gas proceeds		25,188			1,014			—			—			26,202
Accrued interest		22,243			—			—			—			22,243
Deferred taxes *		335			23,043			—			—			23,378
Asset retirement obligations		—			60,837			—			—			60,837
Other current liabilities		39,483			803			—			—			40,286

Total current liabilities		118,235			147,107			8,200			(32,450	)		241,092
Long-term debt		1,044,675			—			—			—			1,044,675
Deferred taxes *		(83,458	)		181,652			—			—			98,194
Asset retirement obligations		3,678			241,157			—			—			244,835
Other long-term liabilities		31,604			—			—			—			31,604

Total liabilities		1,114,734			569,916			8,200			(32,450	)		1,660,400

Commitments and contingencies
Stockholders’ equity:
Common stock		553			—			—			—			553
Treasury stock		(860	)		—			—			—			(860	)
Additional paid-in capital		1,634,171			1,363,981			98,507			(1,462,488	)		1,634,171
Accumulated earnings (deficit)		(942,096	)		(411,672	)		12			411,660			(942,096	)
Accumulated other comprehensive income (loss)		70,812			77,925			(14,227	)		(63,698	)		70,812

Total stockholders’ equity		762,580			1,030,234			84,292			(1,114,526	)		762,580

Total liabilities and stockholders’ equity	$	1,877,314		$	1,600,150		$	92,492		($	1,146,976	)	$	2,422,980

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

CONDENSED CONSOLIDATING BALANCE SHEET

DECEMBER 31, 2014

(In thousands)


	Parent			Guarantor Subsidiary			Non- Guarantor Subsidiaries			Eliminations			Consolidated
Assets
Current assets:
Cash and cash equivalents	$	72,886		$	1,450		$	152		$	—		$	74,488
Restricted cash		177,647			—			—			—			177,647
Accounts receivable		73,711			46,615			33			—			120,359
Fair value of derivative contracts		—			139,179			—			—			139,179
Current income tax receivable		7,212			—			—			—			7,212
Deferred taxes *		4,095			—			—			(4,095	)		—
Inventory		1,011			2,698			—			—			3,709
Other current assets		8,112			—			6			—			8,118

Total current assets		344,674			189,942			191			(4,095	)		530,712
Oil and gas properties, full cost method:
Proved		1,689,802			7,127,466			—			—			8,817,268
Less: accumulated DD&A		(970,387	)		(6,000,244	)		—			—			(6,970,631	)

Net proved oil and gas properties		719,415			1,127,222			—			—			1,846,637
Unevaluated		289,556			241,230			36,579			—			567,365
Other property and equipment, net		32,340			—			—			—			32,340
Fair value of derivative contracts		—			14,333			—			—			14,333
Other assets, net		20,857			1,360			5,007			—			27,224
Investment in subsidiary		1,050,546			—			41,638			(1,092,184	)		—

Total assets	$	2,457,388		$	1,574,087		$	83,415		($	1,096,279	)	$	3,018,611

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable to vendors	$	74,756		$	57,873		$	—		$	—		$	132,629
Undistributed oil and gas proceeds		22,158			1,074			—			—			23,232
Accrued interest		9,022			—			—			—			9,022
Deferred taxes *		—			24,214			—			(4,095	)		20,119
Asset retirement obligations		—			69,400			—			—			69,400
Other current liabilities		49,306			199			—			—			49,505

Total current liabilities		155,242			152,760			—			(4,095	)		303,907
Long-term debt		1,041,035			—			—			—			1,041,035
Deferred taxes *		117,206			169,137			—			—			286,343
Asset retirement obligations		3,588			243,421			—			—			247,009
Other long-term liabilities		38,714			—			—			—			38,714

Total liabilities		1,355,785			565,318			—			(4,095	)		1,917,008

Commitments and contingencies
Stockholders’ equity:
Common stock		549			—			—			—			549
Treasury stock		(860	)		—			—			—			(860	)
Additional paid-in capital		1,633,307			1,362,684			90,339			(1,453,023	)		1,633,307
Accumulated earnings (deficit)		(614,708	)		(440,699	)		12			440,687			(614,708	)
Accumulated other comprehensive income (loss)		83,315			86,784			(6,936	)		(79,848	)		83,315

Total stockholders’ equity		1,101,603			1,008,769			83,415			(1,092,184	)		1,101,603

Total liabilities and stockholders’ equity	$	2,457,388		$	1,574,087		$	83,415		($	1,096,279	)	$	3,018,611

*	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, 2015

(In thousands)


	Parent			Guarantor Subsidiary			Non- Guarantor Subsidiaries			Eliminations			Consolidated
Operating revenue:
Oil production	$	4,350		$	103,157		$	—		$	—		$	107,507
Natural gas production		16,617			11,720			—			—			28,337
Natural gas liquids production		9,879			2,487			—			—			12,366
Other operational income		2,160			—			—			—			2,160
Derivative income, net		—			3,128			—			—			3,128

Total operating revenue		33,006			120,492			—			—			153,498

Operating expenses:
Lease operating expenses		4,976			22,601			—			—			27,577
Transportation, processing and gathering expenses		16,108			1,595			—			—			17,703
Production taxes		2,198			317			—			—			2,515
Depreciation, depletion, amortization		42,112			44,310			—			—			86,422
Write-down of oil and gas properties		491,412			—			—			—			491,412
Accretion expense		91			6,318			—			—			6,409
Salaries, general and administrative		17,001			1			5			—			17,007
Incentive compensation expense		1,563			—			—			—			1,563
Other operational expense		84			—			—			—			84

Total operating expenses		575,545			75,142			5			—			650,692

Income (loss) from operations		(542,539	)		45,350			(5	)		—			(497,194	)

Other (income) expenses:
Interest expense		10,344			21			—			—			10,365
Interest income		(101	)		(16	)		(5	)		—			(122	)
Other income		(133	)		(10	)		—			—			(143	)
Income from investment in subsidiaries		(29,027	)		—			—			29,027			—

Total other (income) expenses		(18,917	)		(5	)		(5	)		29,027			10,100

Income (loss) before taxes		(523,622	)		45,355			—			(29,027	)		(507,294	)

Provision (benefit) for income taxes:
Deferred		(196,234	)		16,328			—			—			(179,906	)

Total income taxes		(196,234	)		16,328			—			—			(179,906	)

Net income (loss)	($	327,388	)	$	29,027		$	—		($	29,027	)	($	327,388	)

Comprehensive income (loss)	($	339,891	)	$	29,027		$	—		($	29,027	)	($	339,891	)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 2014

(In thousands)


	Parent			Guarantor Subsidiary			Non- Guarantor Subsidiaries			Eliminations			Consolidated
Operating revenue:
Oil production	$	6,636		$	131,653		$	—		$	—		$	138,289
Natural gas production		28,839			27,523			—			—			56,362
Natural gas liquids production		18,254			9,716			—			—			27,970
Other operational income		1,042			167			—			—			1,209

Total operating revenue		54,771			169,059			—			—			223,830

Operating expenses:
Lease operating expenses		4,013			42,890			—			—			46,903
Transportation, processing and gathering expenses		10,317			4,309			—			—			14,626
Production taxes		1,681			1,381			—			—			3,062
Depreciation, depletion, amortization		28,055			54,591			—			—			82,646
Accretion expense		68			7,487			—			—			7,555
Salaries, general and administrative		16,325			2			2			—			16,329
Incentive compensation expense		3,134			—			—			—			3,134
Other operational expenses		394			30			—			—			424
Derivative expense, net		—			599			—			—			599

Total operating expenses		63,987			111,289			2			—			175,278

Income (loss) from operations		(9,216	)		57,770			(2	)		—			48,552

Other (income) expenses:
Interest expense		8,353			4			—			—			8,357
Interest income		(79	)		(58	)		(6	)		—			(143	)
Other income		(181	)		(526	)		—			—			(707	)
Income from investment in subsidiaries		(37,345	)		—			(4	)		37,349			—

Total other (income) expenses		(29,252	)		(580	)		(10	)		37,349			7,507

Income before taxes		20,036			58,350			8			(37,349	)		41,045

Provision (benefit) for income taxes:
Deferred		(5,907	)		21,009			—			—			15,102

Total income taxes		(5,907	)		21,009			—			—			15,102

Net income	$	25,943		$	37,341		$	8		($	37,349	)	$	25,943

Comprehensive income	$	18,854		$	37,341		$	8		($	37,349	)	$	18,854

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

THREE MONTHS ENDED MARCH 31, 2015

(In thousands)


	Parent			Guarantor Subsidiary			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Cash flows from operating activities:
Net income (loss)	($	327,388	)	$	29,027		$	—		($	29,027	)	($	327,388	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation, depletion and amortization		42,112			44,310			—			—			86,422
Write-down of oil and gas properties		491,412			—			—			—			491,412
Accretion expense		91			6,318			—			—			6,409
Deferred income tax (benefit) provision		(196,234	)		16,328			—			—			(179,906	)
Settlement of asset retirement obligations		(1	)		(17,144	)		—			—			(17,145	)
Non-cash stock compensation expense		2,640			—			—			—			2.640
Non-cash derivative expense		—			1,511			—			—			1,511
Non-cash interest expense		4,318			—			—			—			4,318
Change in current income taxes		7,188			—			—			—			7,188
Non-cash income from investment in subsidiaries		(29,027	)		—			—			29,027			—
Change in intercompany receivables/payables		(33,748	)		25,548			8,200			—			—
Decrease in accounts receivable		3,606			4,600			—			—			8,206
Decrease in other current assets		1,881			—			2			—			1,883
(Increase) decrease in inventory		(2,415	)		2,415			—			—			—
Decrease in accounts payable		(1,007	)		(7,650	)		—			—			(8,657	)
Increase in other current liabilities		6,347			542			—			—			6,889
Other		(249	)		(11	)		—			—			(260	)

Net cash (used in) provided by operating activities		(30,474	)		105,794			8,202			—			83,522

Cash flows from investing activities:
Investment in oil and gas properties		(84,470	)		(77,229	)		(8,196	)		—			(169,895	)
Investment in fixed and other assets		(662	)		—			—			—			(662	)
Change in restricted funds		177,647			—			(5	)		—			177,642
Investment in subsidiaries		—			—			(8,168	)		8,168			—

Net cash provided by (used in) investing activities		92,515			(77,229	)		(16,369	)		8,168			7,085

Cash flows from financing activities:
Proceeds from bank borrowings		5,000			—			—			—			5,000
Repayments of bank borrowings		(5,000	)		—			—			—			(5,000	)
Equity proceeds from parent		—			—			8,168			(8,168	)		—
Net payments for share-based compensation		(2,991	)		—			—			—			(2,991	)

Net cash (used in) provided by financing activities		(2,991	)		—			8,168			(8,168	)		(2,991	)

Effect of exchange rate changes on cash		—			—			24			—			24

Net change in cash and cash equivalents		59,050			28,565			25			—			87,640
Cash and cash equivalents, beginning of period		72,886			1,450			152			—			74,488

Cash and cash equivalents, end of period	$	131,936		$	30,015		$	177		$	—		$	162,128

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

THREE MONTHS ENDED MARCH 31, 2014

(In thousands)


	Parent			Guarantor Subsidiary			Non- Guarantor Subsidiaries			Eliminations			Consolidated
Cash flows from operating activities:
Net income	$	25,943		$	37,341		$	8		($	37,349	)	$	25,943
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, depletion and amortization		28,055			54,591			—			—			82,646
Accretion expense		68			7,487			—			—			7,555
Deferred income tax provision (benefit)		(5,907	)		21,009			—			—			15,102
Settlement of asset retirement obligations		—			(9,842	)		—			—			(9,842	)
Non-cash stock compensation expense		2,247			—			—			—			2,247
Non-cash derivative expense		—			448			—			—			448
Non-cash interest expense		4,070			—			—			—			4,070
Non-cash income from investment in subsidiaries		(37,345	)		—			(4	)		37,349			—
Change in intercompany receivables/payables		(51,037	)		47,637			3,400			—			—
(Increase) decrease in accounts receivable		(24,762	)		6,160			—			—			(18,602	)
Decrease in other current assets		100			—			—			—			100
Increase in inventory		(928	)		—			—			—			(928	)
Increase (decrease) in accounts payable		1,501			(208	)		—			—			1,293
Increase in other current liabilities		5,212			608			—			—			5,820
Other		145			(525	)		—			—			(380	)

Net cash (used in) provided by operating activities		(52,638	)		164,706			3,404			—			115,472

Cash flows from investing activities:
Investment in oil and gas properties		(46,772	)		(236,903	)		(3,500	)		—			(287,175	)
Proceeds from sale of oil and gas properties, net of expenses		9,700			42,254			—			—			51,954
Investment in fixed and other assets		(1,654	)		—			—			—			(1,654	)
Change in restricted funds		—			—			(358	)		—			(358	)
Investment in subsidiaries		—			—			(3,955	)		3,955			—

Net cash used in investing activities		(38,726	)		(194,649	)		(7,813	)		3,955			(237,233	)

Cash flows from financing activities:
Deferred financing costs		(126	)		—			—			—			(126	)
Equity proceeds from parent		—			—			3,955			(3,955	)		—
Net payments for share-based compensation		(6,565	)		—			—			—			(6,565	)

Net cash (used in) provided by financing activities		(6,691	)		—			3,955			(3,955	)		(6,691	)

Effect of exchange rate on cash		—			—			(11	)		—			(11	)

Net change in cash and cash equivalents		(98,055	)		(29,943	)		(465	)		—			(128,463	)
Cash and cash equivalents, beginning of period		246,294			84,290			640			—			331,224

Cash and cash equivalents, end of period	$	148,239		$	54,347		$	175		$	—		$	202,761