Forest Oil Corporation (FST)

FST 
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Forest Oil (FST)

Q4 2012 Earnings Call

February 21, 2013 11:00 am ET

Executives

Larry C. Busnardo - Director of Investor Relations

Michael N. Kennedy - Chief Financial Officer and Executive Vice President

Patrick R. McDonald - Chief Executive Officer, President, Director and Member of Executive Committee

Analysts

Michael A. Hall - Robert W. Baird & Co. Incorporated, Research Division

Brian Singer - Goldman Sachs Group Inc., Research Division

Pearce W. Hammond - Simmons & Company International, Research Division

Daniel Braziller - BNP Paribas, Research Division

David R. Tameron - Wells Fargo Securities, LLC, Research Division

Brian T. Velie - Capital One Southcoast, Inc., Research Division

Carney Hawks

Paul Grigel - Macquarie Research

Biju Z. Perincheril - Jefferies & Company, Inc., Research Division

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Quarter Four 2012 Forest Oil Corporation Earnings Conference Call. My name is Kathy, and I will be your operator for today. [Operator Instructions] I shall remind you, this call is being recorded for replay purposes. I would like to turn the call over to Mr. Larry Busnardo, Director, Investor Relations.

Larry C. Busnardo

Great. Thanks, Kathy. Good morning. I want to thank you for participating in our fourth quarter and year end 2012 earnings conference call. A replay of this call will be available through March 7 as described in our press release issued yesterday afternoon.

Joining me on the call today is Patrick McDonald, Forest President and CEO; and Michael Kennedy, Executive Vice President and CFO.

Some of the presenters today will reference certain non-GAAP financial measures regularly used by Forest in measuring its financial performance. Reconciliations of such non-GAAP financial measures with the most comparable financial measure calculated in accordance with GAAP will be available on our website and can be viewed by clicking on the Investor Relations tab, then Non-GAAP at forestoil.com. Forest's comments today will include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.

These statements are subject to a number or risks and uncertainties that may cause the actual results in future periods to differ materially from the forward-looking statements. These risks and uncertainties are described in Forest's earnings release and in Forest's public fillings made with the Securities and Exchange Commission.

I will now turn the call over to Michael.

Michael N. Kennedy

Thanks, Larry, and thanks to everyone joining us today. I'd like to first start out with a review of our fourth quarter production results, then move on to a discussion about our balance sheet and finish with a review of our 2013 guidance.

In the fourth quarter, average net sales volumes came in at $309 million per day, which was at the midpoint of our guidance range. Liquids made up 35% of the total volumes, which compares to 30% in the fourth quarter of 2011. The $309 million per day contained approximately $73 million per day of production for our South Louisiana and South Texas divestitures. Pro forma for these divestitures, fourth quarter production was at $236 million per day.

Our focus on oil and liquids projects is paying dividends. Our pro forma oil and liquids volumes increased 47% and 21%, respectively, during the fourth quarter of 2012 as compared to the fourth quarter of 2011. In addition, we posted oil volume growth of 67% and liquids volume growth up 33% for 2012. That's compared to 2011 on a pro forma basis.

These increases are a result of a continued focus on our higher-margin oil opportunities within the Panhandle Area and our development program in the Eagle Ford. I would also note that this growth was accomplished entirely on an organic basis, and I would expect that this upward trend on oil and liquids volumes to continue as Forest currently has 4 of its 5 rigs targeting higher-margin oil opportunities. A reconciliation of our 2012 and 2011 pro forma production volumes can be found on Page 4 of our earnings release.

We set out during the second half of 2012 to improve the company's financial condition and restore flexibility to our balance sheet, and we successfully accomplished this objective. This was primarily done through the sale of noncore assets, culminating in the sale of our South Texas properties that closed last week.

Since announcing a deleveraging plan in July of 2012, we completed just over $600 million of divestitures at accretive metrics to Forest. A portion of the sale proceeds, along with the $500 million senior notes offering we completed in September, were used to fund the redemption of our 2014 senior notes and pay off the outstanding balances on the credit facility, which pushed out our debt maturities. Pro forma for the South Texas divestiture, our total net debt at year end 2012 was approximately $1.5 billion, with an undrawn facility and a $900 million borrowing base.

During 2012, we also took significant steps to protect the balance sheet by aligning our drilling capital to be near our cash flow. Capital spending in the fourth quarter was $103 million, and cash flows came in at approximately $93 million. We will maintain this prudent approach to protect our balance sheet during 2013.

I would now like to touch on our 2013 guidance that was released yesterday afternoon. We have set a 2013 capital budget of $355 million to $375 million, which includes $315 million to $325 million of exploration and development capital and is designed to be near our expected cash flow. The budget calls for 2 rigs in the Panhandle Area, 1 to 2 rigs in the Eagle Ford and 1 rig in East Texas.

Read the rest of this transcript for free on seekingalpha.com