What: Shares of Stone Energy (NYSE: SGY) surged on Tuesday after it reported better-than-expected third-quarter results. Fueling investor enthusiasm was above-guidance production as well as the decision to cut 2016 capex spending to the level of its expected cash flow.

So what: For the third quarter, Stone Energy reported an adjusted loss of $8.4 million, or $0.15 per share. However, there were a number of positives worth noting. Topping that list was production, which averaged 40,000 barrels of oil equivalent per day, or BOE/d, during the quarter. While that was down from the 49,000 BOE/d it produced last quarter, production still came in above its guidance range. The company was able to overcome the shut-in of its Mary field in Appalachia by limiting its downtime in the Gulf of Mexico as well as seeing higher volumes from the Mary field before it was shut in.

Looking ahead, the company expects its production to head higher in 2016 due to a number of projects it has underway. The company is currently using an Ensco (NYSE:VAL) rig to perform completion operations at its Amethyst discovery in the Gulf of Mexico. That discovery is expected to deliver first oil in the first quarter of 2016. Once that Ensco rig is finished at Amethyst, it will move to drill a seventh well in the Cardona Field. That well should start flowing oil by the second quarter of next year.

These new wells will not only bolster production, but will deliver incremental cash flow. That additional cash flow, when combined with lower capex spending, is expected to enable Stone to live within its cash flow in 2016. It's a move that should help the company to better manage through the downturn in oil prices. Having said that, moves like this to further reduce capex will limit future growth and is unwelcome news for drilling contractors like Ensco, suggesting that its future results will also likely be muted.

Now what: While Stone Energy's financial results weren't outstanding, it is making some progress. Its production was higher than expected and should keep heading higher next year after a couple of new wells come on line. Furthermore, with a plan to balance cash flow with capex, the company is in a much better position to weather the potential continued weakness in oil prices.

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