Stone Energy (SGY) Stock: Taking Off Like A Rocket

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Stone Energy Corporation (NYSE: SGY)

Stone Energy Corporation is having an incredible time in the market today. The gains are following up on what we saw yesterday and come for good reason. Yesterday, the company announced that it had terminated one agreement and signed another. Today, we’ll talk about the news, how the market reacted, and what we can expect to see from SGY moving forward.

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SGY Terminates Ensco Contract

The first part of the announcement that was made yesterday surrounded the fact that Stone Energy has decided to terminate a long-term contract. The contract was with Ensco, surrounding deep water rigs. In order to terminate the contract, the company has agreed to pay penalties.

First and foremost, SGY will pay $20 million to Ensco. It is estimated that $5 million of this total was already given to Ensco pursuant to the drilling services contract. Also, the company has agreed to provide Ensco with the opportunity to perform certain drilling services. Finally, the company has paid Ensco a $5 million deposit that will be used as credit against future drilling activities initiated before March 31, 2017.

Stone Energy Enters Agreement With Williams

Also in the press release yesterday, SGY announced that it had entered into a new agreement. The agreement is an interim gas gathering and processing agreement with Williams. The gathering and processing will take place at the Mary field in Appalachia. This new contract provides SGY with near-term relief, as it allows the company to resume production at the Mary field. In return, the company will be able to provide greater volume to Williams.

It is expected that volumes out of the Mary field will come in around 45 MMcfe per day in the beginning. However, by July, that volume is expected to climb to 60 MMcfe per share, and by August, it should climb to 100 MMcfe per day. According to the release, the above volumes are in addition to the approximately 20 MMcfe per day of production from the Heather and Buddy fields. In a statement, David Welch, President and CEO at SGY, had the following to offer:

We are very pleased to reach agreements with both Ensco and Williams on these two important contracts. The termination of the Ensco contract eliminates a long term obligation, which provides Stone with additional financial flexibility. The interim contract with Williams allows us to resume profitable production and positive cash flow at our Mary field in West Virginia. We appreciate Ensco’s and William’s willingness to work with Stone during this difficult period of sustained low commodity prices.”

How The Market Reacted To The News

As investors, one of the first things that we learn is that the news moves the market. Anytime positive news is released with regard to a publicly-traded company, we can expect to see gains in the value of the stock associated with the company. In this particular case, the news released by SGY was overwhelmingly positive. As a result, we saw strong gains in the market yesterday. Today, these gains are continuing as the stock rockets upward. Currently (12:31), the stock is trading at $13.73 per share after a gain of $1.67 per share, or 13.85%, thus far today.

What We Can Expect To See Moving Forward

Moving forward, I have a relatively mixed opinion of what we can expect to see from SGY. In the short term, I’m expecting that more gains will come as the company works to make it through a rough time for those in the basic materials sector. With the cancellation of one contract and signature on the new contract, the company has made a way to survive.

However, investors don’t just like to see survival. They like to see companies thrive. Given the current market conditions, thriving simply doesn’t seem like something that’s going to happen any time soon. So, there is quite a bit of long-term downside risk. Therefore, if you decide to move on an SGY trade, please do move with caution.

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What Do You Think?

Where do you think SGY is headed moving forward and why? Join the discussion at TalkTRENDZ from CNA Finance!

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