Stone Energy Corp. (NYSE: SGY) has halved its 2015 capex to $450 million—a move that some analysts are applauding.

Stone said Jan. 20 that it plans to allocate 75% of its capital to deepwater/Gulf Coast, 8% to Appalachia, 4% to business development and 13% to abandonment expenditures.

The Lafayette, La.-based company’s capex assumes planned sales of minority working interests in certain targeted assets and excludes acquisitions and capitalized selling, general and administrative expense, and interest.

“Overall, we commend management’s choice to reduce total cape by 50% year-over-year to $450 million in order to preserve long-dated projects [the Harrier and Vernaccia projects], maintain leasehold position in Appalachia with limited spending and protect their balance sheet through capital discipline,” said Andy Peterson, analyst at Simmons & Co. International, in a Jan. 21 report.

Furthermore, Peterson said he anticipates the company might use its Amethyst discovery in the Gulf of Mexico (GoM), where it holds 100% working interest, as leverage in 2015.

“We would not be surprised if management chooses to sell a portion down to help fund capex and maintain the balance sheet,” he said.

Deepwater Strategy

The deepwater capital budget is focused on development and exploration drilling, facility installations for development work, completion operations and seismic and lease acquisition, the company said.

In 2015, the company plans a development, the Cardona #6. The company expects production to commence in the second quarter. The company holds 65% operated working interest in Cardona.

The deepwater Cardona project commenced initial production in December with two test wells. The wells are currently flowing to the Pompano facility at a gross rate of about 10,000 barrels of oil equivalent per day (boe/d). Pressure maintenance and reservoir management have been the primary focus during this initial production phase.

A portion of the 2015 budget is allocated to the expected arrival in the fourth quarter of a platform rig for the Pompano drilling program. The company said it expects to install a flowline back to the platform.

Stone also plans to participate in two exploration wells in the first quarter of 2015 at the Harrier and Vernaccia prospects. Both wells are potential tie-backs to the Pompano facility.

The company holds 37% working interest in Harrier, which is operated by ConocoPhillips Co. (NYSE: COP), and 32% working interest in Vernaccia, which is operated by Eni SpA (NYSE: E).

The deepwater Madison prospect, located on Mississippi Canyon 479, will be plugged and abandoned because it did not encounter commercial hydrocarbons. Stone holds a 40% nonoperated working interest in the Madison project, which is operated by Noble Energy Inc. (NYSE: NBL).

Production is expected to increase in the deepwater GoM for 2015 as compared to 2014 due to production from the two Cardona project wells. Production for 2015 is expected to be in the 39-43 Mboe/d range, or 234-258 million cubic feet equivalent per day (MMcfe/d).

Additionally, production from the conventional shelf and the La Cantera gas field is expected to decline during the year. Capital dedicated to the GoM conventional shelf will be primarily used for recompletions, improvements to existing infrastructure and required plug and abandonment operations.

For increased efficiencies, the company said its conventional shelf and deep gas operating groups have been consolidated within the deepwater operations. The remainder of the capital budget is focused on onshore business development opportunities.

Appalachia

In Appalachia, the company plans to secure additional core leasehold interests and drill several Marcellus wells in the first quarter. The Marcellus drilling rig will be released in February. No further Marcellus drilling is projected for the rest of the year, the company said.

In the Utica Shale, Stone’s successful exploration well has been producing since Dec. 1, 2014. Production has averaged about 15 MMcf/d since inception.

The company said it expects to receive a dual-purpose Utica/Marcellus rig late in the fourth quarter for a 2016 drilling program that is capable of drilling in either shale formation.

In Appalachia, production averaged about 100 MMcfe/d for 2014 and reached about 140 MMcfe/d in late December, with a natural decline expected throughout 2015. The company still expects to increase production from its Appalachia operations by more than 15% in 2015 vs. 2014 despite the decision not to drill and complete any wells this year.

Outlook

Stone’s year-end 2014 estimated proved reserves were 152 MMboe, or 912 Bcfe, as compared with 144 MMboe or 863 Bcfe at year-end 2013, which represents a 5.5% increase in estimated proved reserves.

Additionally, proved developed reserves are now 51% compared with about 56% at year-end 2013, Peterson said.

“While this may seem disappointing, we anticipate this was an expected result given the current commodity pricing environment, and expect investors are focused on forward-looking metrics such as 2015 capital budgets and outspend,” he said.

On a more positive note, Peterson said 60% of Stone’s $1.75 billion PV-10 value yields $1.05 billion, significantly above the company’s current credit facility of $500 million. This gives the company a cushion from any sort of downward redetermination to its bank facility, he said.

The company achieved a number of milestones in 2014 that have given itself an ideal position for the year ahead, said David Welch, chairman, president and CEO of Stone, in a Jan. 20 news release.

“We maintained our liquidity position with over $250 million in cash and an undrawn $500 million bank facility at year-end to help navigate through the current challenging markets,” Welch said. “Finally, we have reacted quickly to the commodity price collapse by significantly reducing capital expenditures, operating costs and overhead, and simplifying the organization.