Stone Energy Downgraded to Strong Sell - Analyst Blog

On Apr 14, 2014, Zacks Investment Research downgraded Stone Energy Corporation SGY to a Zacks Rank #5 (Strong Sell).

Why the Downgrade?

Stone Energy holds an opportune place in the industry with widespread high yielding inventory. The company has an extensive capital project inventory. Although Stone Energy aims to apportion the capital across its portfolio, the focus will be on the Gulf of Mexico (GoM) shelf as well as the Marcellus region.

The company's main focus remains on the GoM shelf as well as the Marcellus region. The growing exploration exposure to the mature, low reserve life and capital intensive GoM shelf is expected to aggravate Stone Energy's risk profile.

Stone Energy's fourth quarter results were disappointing as both the earnings and revenues lagged the Zacks Consensus Estimate and decreased on an annual basis. The lower price realizations affected profitability. The independent oil and gas exploration and production company reported negative earnings surprises in the last 2 of the 4 quarters, with average earnings surprise of 4.42%.

With the advancement in technology, a shift to unconventional drilling has become more widespread. However, the uncertainty regarding the regulation of these practices presents an investment risk. Increased precautions and regulations in the wake of oil spills have increased the cost pressure on companies like Stone Energy, thus affecting cash flows.

Other risks faced by the company are changes in government regulations, dependence on individual well performance, possibility of unsuccessful wells and leverage to the company's drilling pace.

Stocks That Warrant a Look

Better-ranked stocks in the oil and gas industry include Range Resources Corp. RRC, Unit Corp. UNT and Helmerich & Payne, Inc. HP. All three stocks sport a Zacks Rank #1 (Strong Buy).