Forest Oil Corporation
) second quarter 2012 earnings of 6 cents per share (excluding
non-recurring items) decreased significantly from the year-earlier
earnings of 25 cents. The lackluster performance was mainly due to
the lower prices realized for natural gas as well as natural gas
liquid (NGL). However, the quarterly figure came slightly ahead of
the Zacks Consensus Estimate of 5 cents.
Total revenue in the reported quarter decreased to $135.7 million
from the year-ago level of $186.9 million, and failed to meet the
Zacks Consensus Estimate of $158.0 million.
Net sales volumes remained flat year over year at 335.4 million
cubic feet equivalent per day (MMcfe/d) in the reported quarter,
mainly due to production downtime related to a fire at Eagle Rock's
Phoenix-Arrington Ranch natural gas processing facility in Hemphill
However, the company has been able to raise its oil net sales
volume, which organically increased 27% from the year-ago period to
8.3 million barrels per day (MBbls/d) but decreased 1%
sequentially. Natural gas sales volume shrunk 4.9% year over year
to 229.4 MMcf/d, and comprised 68% of the total quarterly volume.
The average equivalent price per Mcf (including the effect of
hedging) was $5.46, down almost 12% from the year-ago realization
of $6.20. Natural gas was sold at $3.20 per Mcf, down 32.2% from
the comparable prior-year quarter, and natural gas liquids (NGLs)
were sold at $30.06 per barrel, down 17.1% from the year-ago
quarter. However, average realized oil price was $98.21 per barrel,
up 5.5% from the year-ago quarter.
During the quarter, production expenses decreased 5.4% year over
year to $1.23 per Mcfe. Unit general and administrative expenses
increased marginally year over year to 35 cents per Mcfe from the
year-ago level of 34 cents per Mcfe. Depreciation and depletion
expenses per unit increased 39% to $2.39 per Mcfe from $1.72 per
Mcfe in the second quarter of 2011.
At quarter end, Forest had $0.7 million of cash and cash
equivalents with $1,938.9 million of long-term debt, representing a
debt-to-capitalization ratio of 73.6% (up from 60.0% at the end of
first quarter 2012).
Earlier, the company highlighted that it plans to trim its spending
rate as well as divest non-core properties during the second half
of the year. This is needed to boost its financial strength and
The company expects capital expenditure between $190 million and
$210 million for the second half of 2012, down from the spending
level of $435 million in the first six months of the year. Forest
Oil intends to spend less in lower return liquids projects in East
Texas and in the Panhandle area.
Additionally, Forest Oil aims to slash costs by reducing the number
of rigs to just two from five at present in the Panhandle area by
the fourth quarter of 2012. It will also likely have one rig
operating in East Texas, compared with the two rigs there at
The next step needed to stabilize its financials will depend on
identification and divestiture of non-reserve based and non-core
assets in the near future. It will likely offload its properties to
get rid of a $1.8 billion debt load.
Lone Pine Spin-off
During 2011, the company completed the spin-off of
Lone Pine Resources Inc.
). Subsequent to the initial public offering of Lone Pine on June
1, 2011, Forest owned approximately 82% of the outstanding shares
of Lone Pine's common stock.
On September 30, 2011, Forest distributed, or spun off its
remaining ownership in Lone Pine in the form of a pro rata common
stock dividend to all Forest shareholders of record as of the close
of business on September 16, 2011 (the Record Date). Forest
shareholders received 0.61248511 of a share of Lone Pine common
stock for every share of Forest common stock held as of the close
of business on the record date.
We like Forest Oil's initiatives to increase 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.
The company registered impressive results from its Hogshooter and
Cleveland oil plays in the Panhandle Area and from its Eagle Ford
program. Forest Oil intends to spend the remaining capital budget
for the year mainly towards the higher-margin oil ventures. It also
expects to deliver oil volume growth of 10-15% in the next half of
the year versus the first half.
Although the company has already started reducing its spending
level for lower-return liquids and natural gas projects, we remain
skeptical about its natural gas weighted production level. As
natural gas accounted for 68% of the company's total production in
the second quarter of 2012, Forest Oil is exposed to the cautious
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 NGLs.
We maintain our long-term Neutral recommendation on Forest Oil. The
company holds a Zacks #3 Rank (short-term Hold rating).
FOREST OIL CORP (FST): Free Stock Analysis
LONE PINE RSRCS (LPR): Free Stock Analysis
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