On Jul 2, we reiterated our long-term Neutral recommendation
Forest Oil Corporation
) as it is proactive in expanding liquid production and growing
its upstream presence. However, the tepid gas price scenario
keeps us on the sidelines. The stock retains a Zacks Rank #3,
which is equivalent to a short-term Hold rating.
Why the Reiteration?
Denver-based independent oil and gas company, Forest Oil's
efforts to expand its liquid production in order to maximize
margin is gaining traction.
We like the initiatives undertaken by Forest Oil to increase
its liquids production. The company's focus on cost control and
the upside from Granite Wash and the Missourian Wash interval
position it well to weather the weakness in natural gas prices.
Forest Oil has a growing upstream presence in the emerging basins
of Texas, Canada and Mexico.
Forest Oil is making every effort to expand its liquid
production. The company has already added considerable acreage in
the Permian Basin, enabling Forest to access potential oil
resources in several oil-bearing pay zones, including the
Wolfbone and Wolfcamp Shale plays. Production for the year is
expected to average 220-230 million cubic feet equivalent per day
(MMcfe/d). The forecast is mainly centered on oil, which should
be favorable in light of weak gas prices with liquids comprising
40% of the total production.
Forest Oil has a growing upstream presence in the emerging
basins of Texas, Canada and Mexico. Production growth from the
Eagle Ford Shale is a key component of the company's overall
annual upstream growth plans over the next few years.
However, on the flip side, the company has a highly
gas-weighted reserves/production profile (natural gas accounted
for more than 66% of the total production in the first quarter of
2013) and exposure to the inherently cyclical and volatile
exploration and production sector. This is not helped by its
highly levered balance sheet. Long-term debt (including current
portion) stood at $1,640.4 million, representing a
debt-to-capitalization ratio of 46.4% at the end of the first
The company nonetheless is intent on divesting its non-core
properties to boost financial strength and flexibility. We
believe this will eventually allow the company to aggressively
pursue growth opportunities in its plays and provide meaningful
upside potential for investors.
Other Stocks to Consider
Stocks within the oil and gas sector worth considering are
Oasis Petroleum Inc.
PetroQuest Energy Inc.
Sanchez Energy Corporation
). All the stocks have attractive prospects and carry a Zacks
Rank #1 (Strong Buy).
FOREST OIL CORP (FST): Free Stock Analysis
OASIS PETROLEUM (OAS): Free Stock Analysis
PETROQUEST ENGY (PQ): Free Stock Analysis
SANCHEZ ENERGY (SN): Free Stock Analysis
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