Forest Oil Corporation (FST)

FST 
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Forest Oil Corporation (FST)

Q3 2010 Earnings Call Transcript

November 2, 2010 2:00 pm ET

Executives

Pat Redmond – VP, Corporate Planning and IR

Mike Kennedy – EVP and CFO

Craig Clark – President and CEO

J.C. Ridens – EVP and COO

Analysts

Matt Portillo – Tudor, Pickering, Holt

Scott Hanold – RBC Capital Markets

Dave Kistler – Simmons & Company

Crystal Choi – Raymond James

Gil Yang – Bank of America

Brian Singer – Goldman Sachs

Dan McSpirit – BMO Capital Markets

Dan Morrison – Global Hunter

David Deckelbaum – UBS

Ray Deacon – Pritchard Capital

Alex Meier [ph] – ZLP [ph]

John Harlin [ph] – South General [ph]

Presentation

Operator

Good afternoon. My name is Sarah, and I will be your conference operator today. At this time, I would like to welcome everyone to the Forest Oil announces third quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session.

Thank you. Mr. Redmond, you may begin your conference.

Pat Redmond

Thank you. Good afternoon. I want to thank you for participating in our third quarter 2010 earnings conference call. I will note that a replay of this conference call will be available through November 16 as described in our press release issued yesterday.

We have joining us today Craig Clark, President and CEO; Michael Kennedy, Executive Vice 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 our Web site and can be viewed by clicking on the Investor Relations tab, then non-GAAP, then www.forestoil.com.

In addition, I’d 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,” “believes,” “budgets,” “forecasts,” “projects,” “estimates,” “anticipates,” etc., 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 will now turn the call over to Michael Kennedy. Thank you.

Mike Kennedy

Thanks Pat, and thanks everyone joining us today. Third quarter 2010 production of 457 million a day was up sequentially from the second quarter pro forma for asset divestitures, and was well ahead of guidance of approximately 440 million per day. This marks the third consecutive quarter of sequential organic growth and our production exceeding guidance.

Again, this growth was achieved due to continuing outperformance of our drilling program in the Texas Panhandle. Our liquids production has increased over 5,500 barrels per day during the year, so the growth for the year is almost entirely liquids, which make Forest somewhat unique.

Net debt during the quarter decreased approximately $50 million as the E&D CapEx and cash flow were almost at parity and we closed approximately $50 million of previously announced asset sales during the quarter.

I’m starting to sound like a broken record, but they have double-digit annual production growth driven by liquids, while keeping net debt flat highlights our asset quality and capital efficiency which distinguishes Forest from his peer group.

Production expense came in at $1.18 per m, which was at the low end of guidance and cash G&A expense came in at $0.31 per m. These two combined measures put our operating costs per Mcfe at $1.49, which is top quartile performance in the peer group.

DD&A expense was $1.54 which was a little higher than expected due mainly of the future development costs increases to reflect the continued elevated service cost environment.

E&D capital expenditures during the quarter were $149 million, which was a decrease sequentially from $174 million in the second quarter. Our CapEx will decrease further in Q4 2010 to approximately $120 million to $140 million as we’re not currently running any dry gas rigs in the U.S.

With production increasing in Q4 2010 and capital expenditures decreasing, we expect to have free cash flow during the upcoming quarter and less net debt at year end.

On the hedging, during the quarter we had realized gains of approximately $35 million from our NYMEX hedges and had realized losses of approximately $8 million associated with our basis hedges.

In reviewing sell side analysts estimates, we noticed that the basis loss is not properly modeled into the earnings forecast. Basis continues to be tight unless we realized a similar loss in Q4 2010. So please factor this into your estimates. Also note that we do not have any basis hedged currently in 2011.

We continued to add to our 2011 hedge position as we now have 115 million a day hedged on natural gas at $5.68, and 3,000 barrels hedged on oil.

I’ve noticed that we also entered into our first NGL hedges and have locked in 3,000 barrels per day in 2011 at $36.70. These are typical levels for our hedging program and we opportunistically lay on additional hedges when we see improvement in the futures market.

Forest raised 2010 production guidance for the second straight quarter and we are now expecting approximately 20% organic growth in 2010. This is raised despite the Canadian pipeline estimated service stake being in late November. Again, this is heavily sponsored by our Texas Panhandle production’s continued outperformance.

So to summarize the quarter, Forest continues to deliver better than expected organic production growth, driven by liquids while decreasing net debt by $50 million. This trend is forecast to continue as our guidance suggest 4% sequential organic growth for Q4 2010, including approximately 22,000 barrels per day of liquids, which should drive cash flow in excess of capital expenditures. The repeatability of this performance during 2010 provides positive momentum heading into 2011.

With that I will turn the call over to Craig.

Craig Clark

Thanks Mike. Good job on the financial results as well as with the hedging and guidance. As folks can see, our numbers are on target and exceed the guidance we provided. Nice to raise production guidance for the second consecutive quarter even though spending remains at the same level or in fact has decreased.

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