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Forest Oil Corporation (FST)
Q2 2010 Earnings Call Transcript
August 3, 2010 2:00 pm ET
Patrick Redmond – VP, Corporate Planning & IR
Mike Kennedy – EVP & CFO
Craig Clark – President & CEO
J.C. Ridens – EVP & COO
Dave Kistler – Simmons & Company
Brian Singer – Goldman Sachs
Gil Yang – Bank of America Merrill Lynch
Amir Arif – Stifel Nicolaus
Dan Morrison – Global Hunter
Kristal Choy – Raymond James
Dan McSpirit – BMO Capital Market
Jeff Robertson – Barclays Capital
David Tameron – Wells Fargo
Scott Hanold – RBC
Raymond Deacon – Pritchard Capital
Previous Statements by FST
» Forest Oil Corporation Q4 2009 Earnings Call Transcript
» Forest Oil Corp. Q3 2009 Earnings Call Transcript
» Forest Oil Corp. Q2 2009 Earnings Call Transcript
Thank you. Mr. Redmond, you may begin your conference.
Thank you, and good afternoon. I want to thank you for participating in our second quarter 2010 earnings conference call. I will note that a replay of this conference call will be available through August 17, as described in our press release issued yesterday. We have joining us today Craig Clark, President and CEO; Michael Kennedy, Executive President and CFO; and J.C. Ridens, Executive Vice President and COO.
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 are available on the Web site and can be viewed by clicking on the Investor Relations tab, then non-GAAP at www.forestoil.com.
In addition, I would like to caution you about our forward-looking statements. All statements other than statements of historical facts that address activities and outcomes that Forest expects, assumes, plans, believe, budgets, forecast, projects, estimates, anticipate, et cetera, about what will should or may occur in the future are forward-looking statements.
Please carefully review our cautionary language regarding forward-looking statements that is contained at the end of our press release.
I’ll now turn the call over to Mike Kennedy. Thanks.
Thanks Pat, and thanks everyone joining us today on a busy earnings day. Second quarter 2010 production of $464 million a day was up 11% sequentially from the first quarter, and was well ahead of our guidance of approximately $445 million per day.
This was achieved while our net debt remained flat for the quarter at $1.7 billion. The substantial organic growth rate while not levering the balance sheet highlights the quality of our asset base. Majority of the growth was derived from our liquids rich Texas Panhandle Granite Wash play. This resulted in increase in our liquids component of our production to 25% from 22% in Q1 2010.
To drill down further, the business unit that contains the Granite Wash had approximately 25% growth in the quarter, while spending just over its cash flow. To have an asset with this growth ability, while self-funding is quite unique and Forest is one of the industry leaders in this play.
Realizations were positive again this quarter as differentials for natural gas came in at $0.35 per Mcfe and oil came in at $6.61 per barrel. There was a slight weakness in NGL pricing as it came in at 41% of WTI.
Production expense was impressive once again as our relentless cost cutting initiatives drove it down to $1.11 per Mcfe or down 8% sequentially. These initiatives have also enabled us to lower production expense guidance by $5 million for the year.
Cash, G&A expense also decreased sequentially by $0.07 to $0.29 per Mcfe. DD&A expense was in line at $1.48 per Mcfe. Our E&D capital expenditures decreased in the quarter to $174 million from $216 million in Q1. We expect this trend to continue in this second half of 2010.
We also invested $31 million in lease hold acquisitions, mostly in Canada, as we completed our grassroots leasing program in the Nikanassin resource play.
During the quarter, Forest’s net debt remained flat at $1.7 billion and liquidity was in excess of $1.5 billion. We were also able to meet our 2010 divestiture goal by selling 16 million a day of production for a $135 million. The divestiture goal was met without including the sale of our East Texas midstream assets, which is on track to close in Q3 2010.
With the better than expected asset sales and cash flow approximating E&D CapEx, it appears that we should have lower net debt by the end of the year.
During the quarter, we also started our 2011 natural gas hedging program by putting on 90 million a day of swaps at $5.86. This is the normal timing for our hedging program and provides an attractive base for us to build on. We normally hedge approximately 40% to 50% of our upcoming year’s production, so you’ll see us adding our hedge portfolio over the coming months.
We’ve also updated our guidance to reflect better than expected drilling results in the Texas Panhandle Granite Wash. Production guidance for the year was increased to 443 million to 453 million per day with Q4 2010 guidance increasing to 465 million to 475 million per day with the liquids component growing to 27.5%.
This increase takes in account the year-to-date divestitures of 16 million a day and thus increases our Q4 production guidance by approximately 29 million per day. This is an extra organic increase of 7% and takes our Q4 over Q4 organic growth rate to 17% to 19%.