Forest Oil Kept at Neutral - Analyst Blog

By Zacks Equity Research,

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We are maintaining our Neutral recommendation on Forest Oil Corporation ( FST ), reflecting its strong asset base and revised production outlook, partially offset by gas price volatility.

Denver-based Forest Oil is an independent oil and gas company engaged in the acquisition, exploration, production and development of oil and gas properties in North America. The company has been streamlining its portfolio in the recent past, through asset acquisitions as well as divestitures.

Forest Oil has substantial holding in the Eagle Ford that is expected to expedite transition to liquids with the recent completion of an extended 7,500 lateral well with an initial production rate of approximately 1,000 barrels of oil equivalent per day (Boe/d). Eagle Ford acreage, located in the Gonzales and Wilson Counties of the play, has produced some of the inexhaustible wells to date and is expected to emerge as Forest's most active area.

With an expected ramp-up in production, Forest Oil increased its volume outlook for 2012 by 5% to 6% over 2011 levels to 350-355 million cubic feet equivalent per day (MMcfe/d). Net liquids sales volumes are expected in the range of 17.5 - 17.8 million barrels per day (MBbls/d), up almost 10% from the prior-year level. The company also plans to invest nearly $550 - $600 million on capital projects.

We also remain optimistic about the company's entry into the Wolfcamp Shale, where it captured an extensive 48,000 net acreage, with pricing as low as $1,000 per acre.

However, our optimism is somewhat dampened by Forest Oil's lackluster third quarter performance. The company reported earnings from continuing operations of 25 cents per share (excluding non-recurring items), missing the Zacks Consensus Estimate by a penny.

Total revenue in the quarter was $174.1 million, lagging our projection of $223 million. The results were impacted by lower natural gas price realization and net sales volumes, which were partially offset by the higher oil and natural gas liquids prices.

With the spin-off of Lone Pine Resources Inc ( LPR ) in the third quarter, Forest Oil has lost an important unit. We believe that the company will take some time to adjust to the aftereffects of the separation.

Moreover, with natural gas accounting for approximately 73% of total production (as of September 30, 2011), Forest Oil is exposed to the tentative outlook of the North American natural gas market. Its operations and cash flow are more sensitive to fluctuations in the market price for natural gas than to fluctuations in the market price for oil and natural gas liquids.

Hence, we expect the stock to perform in line with the broader market. Forest Oil currently holds a Zacks #3 Rank (short-term Hold rating).

FOREST OIL CORP ( FST ): Free Stock Analysis Report
LONE PINE RSRCS ( LPR ): Free Stock Analysis Report
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Zacks Investment Research

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Business , Stocks
Referenced Stocks: FST , LPR

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