Stone Energy Corp.

Many people’s first thoughts of the Appalachia region may turn to moonshine, Daniel Boone and country and bluegrass music, but the area that surrounds the Appalachian Mountain range and spans from northeastern Mississippi up to western New York is also well known for its vast natural resources. It is this particular characteristic of the region that attracted Stone Energy Corp. to the area, to execute its strategy to profitably grow its gas reserves.

Based in Lafayette, La., Stone Energy also has offices in New Orleans, Houston and Morgantown, W.V. As an independent oil and natural gas exploration and production company, Stone Energy is focused on leveraging high cash flow generated from existing assets to maintain relatively stable production in the Gulf of Mexico shelf, profitably grow its gas reserves in price-advantaged basins and profitably grow its oil reserves in material impact areas such as deep-water Gulf of Mexico. A publicly traded company for nearly two decades, the company has traditionally focused on the Gulf of Mexico, but changing market conditions have begun to draw its interest further North.

“Throughout our history, we’ve primarily focused on offshore oil and gas development from the Gulf Coast conventional shelf,” Vice President Rick Toothman explains. “The shelf, however, is a maturing asset so we began exploring the deep water region of the Gulf and deep gas onshore.

“To further diversify hurricane, commodity price and regulatory risks, we also started focusing on the unconventional shale resources in Appalachia,” he continues. “With the size of the play, the proximity to the market, and the reservoir quality of the Marcellus shale, we wanted to explore here.”

Infrastructure In Place
By 2012, Stone Energy controlled approximately 90,000 acres of Marcellus Shale leasehold rights in West Virginia and Pennsylvania, and it continues to expand its operations in this play. The company has dedicated approximately 30 full-time employees to this area, as well as more than 200 additional consultants and contractors to perform construction, drilling, completions and production operations.

“A few years ago, Stone started evaluating acreage in Pennsylvania and West Virginia,” Toothman says. “In 2009, we drilled vertical wells to test the Marcellus formation, and in 2010 we started our horizontal program.

“Sixteen wells were drilled, confirming the results of our vertical test program,” he continues. “Additionally, we started evaluating pipeline opportunities to determine how we would get the product to market.”

Last year, Stone Energy drilled 27 horizontal wells, focusing on the areas with the most prospectivity so it could drive efficiency and profitability, he says. Focusing on liquids-rich portions of the shale, the company is employing pad drilling. This specific approach involves drilling about five to eight wells per pad before rig mobilization is required. Stone Energy moves its produced hydrocarbons through gas and condensate lines owned and operated by a midstream pipeline company.

“These pipelines are operational and very reliable,” he says. “By using them, we’re minimizing trucking, which reduces road wear, and is much safer, and much more efficient.”

To support its operations, Stone Energy also has constructed a “sophisticated water infrastructure system,” Toothman says.

It includes a freshwater river intake and water impoundment, which provides transfer of up to 1.5 million gallons of water per day to support its fracking. Above ground, the company also built a 5-million-gallon storage facility for water recycling.

“We can minimize our footprint because of our water system,” he says. “With this infrastructure in place, we are working very efficiently and seeing our well costs dramatically decrease. Recycling reduces the amount of freshwater required for our operations and reduces the need for disposal into approved underground injection wells.”

Local Strength
“Stone Energy’s priorities are clear: safety first; protect the environment; comply with laws and regulations; maximize production; and minimize costs. Applying our priorities to the Appalachia region means that we are not trying to be the largest producer, but merely the safest and most profitable,” Toothman stresses. At this time, the company’s largest footprint is in the liquids-rich area of Appalachia, and it plans to continue expanding that footprint. He explains the company is swapping and trading some of its other properties that are less drillable, but it will go back and expand those areas when prices start to rebound.

What has been a boon to Stone Energy’s Appalachian operations, he notes, is that the majority of its workers are from the region and many of them moved back to the area after gaining industry experience in other parts of the country. This allowed the company to mobilize quickly when it began working in the region.

“We opened our Morgantown office and hired people with Appalachian roots,” Toothman says. “Either they have worked in this basin for the majority of their career, or have worked in other areas and came back home. As a result, we have a very experienced working group with strong technical skills and a good understanding of the culture and environment of the area.”

Topographically, he says, the area is filled with hills, valleys and streams, so Stone Energy’s pads are restricted to the ridge tops or valley bottoms. Additionally, “significant big temperature fluctuations” can cause major operational issues, and the company has to take this into consideration when designing and operating its wells and facilities.

“Having a team with knowledge of the area helps when we are establishing our operations in this region,” Toothman says. “There are many individual, small tracts of land that comprise a drilling unit. Oftentimes, we are dealing with hundreds of undivided mineral interest owners and multiple surface owners to drill only one well. Ownership has been handed down through generations to multiple descendants. It’s good to know how to deal with the issues that arise from that.”

In and Out, Efficiently
By the end of 2012, the Appalachian region will represent nearly 40 percent of Stone Energy’s reserves, as well as 20 to 25 percent of the company’s production. “Appalachia operations have become a significant asset of Stone Energy in just a little more than two short years,” Toothman stresses. Next year, the company will continue to execute its current plan and keep its dedicated drill rigs working on horizontal wells. The goal, he says, is to remain steady and to fully utilize its employees and support staff.

“The company has a $625 million budget this year overall and $200 million of that is for Appalachia,” Toothman says. “It is a very good project with a good balance of gas and oil. The liquids help us negotiate through the low gas price setting.”

As it expands, Stone Energy’s strategy is to develop its acreage as efficiently and as quickly as it can. “We want to compress the time between construction, drilling, and completion to start generating revenue for ourselves and royalties for our leasors,” Toothman notes. By getting in and getting out as quickly as it can, Stone Energy Corp. also will minimize its community impact, he says.

“Stone’s leadership and culture really make this company what it is today,” he stresses. “We put a tremendous emphasis on safety and environmental integrity, and we remain very open in our actions. Most importantly, we treat our people with respect and because of that, they feel valued and work hard to contribute. Most of our folks have a desire to be here and have a sense of pride in our operations. They are here because they want to be, and this is what makes our company so strong.” EMI