Forest Oil Corporation (FST)

FST 
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Forest Oil (FST)

Q4 2010 Earnings Call

February 22, 2011 2:00 pm ET

Executives

Patrick Redmond - Vice President of Corporate Planning and Investor Relations

John Ridens - Chief Operating Officer and Executive Vice President

Michael Kennedy - Chief Financial Officer and Executive Vice President

H. Clark - Chief Executive Officer, President, Director and Member of Executive Committee

Analysts

Jeffrey Robertson - Barclays Capital

Brian Singer - Goldman Sachs Group Inc.

Scott Hanold - RBC Capital Markets, LLC

Dan McSpirit - BMO Capital Markets U.S.

Biju Perincheril - Jefferies & Company, Inc.

William Lee - Scotia Capital Inc.

David Tameron - Wells Fargo Securities, LLC

Gil Yang - BofA Merrill Lynch

Alex Meier - Zimmer Lucas

Scott Wilmoth - Simmons

Brian Lively - Tudor, Pickering, Holt & Co. Securities, Inc.

Presentation

Operator

Good afternoon. My name is Christie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Forest Oil Fourth Quarter and Year End Earnings Conference Call. [Operator Instructions] I will now turn the conference over to Mr. Patrick Redmond, Vice President, Corporate Planning and Investor Relations.

Patrick Redmond

Thank you, and good afternoon. I want to thank you for participating in our fourth quarter and year-end 2010 earnings conference call. I will note that the replay of this conference call will be available through March 8 as described in our press release issued this morning. 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 our website and can be viewed by clicking the Investor Relations tab, then non-GAAP at 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, forecast, projects, estimates, anticipates, 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 will now turn the call over to Michael Kennedy. Thank you.

Michael Kennedy

Thanks, Pat, and thanks to everyone joining us on a busy earnings day. Fourth quarter 2010 production of 472 million per day was up 3% sequentially from the third quarter and was within guidance. This was achieved while generating free cash flow during the quarter of $40 million. Also, fourth quarter 2010 production was up 19% compared to the same period in 2009 pro forma for divestitures. Notably, the 19% organic growth was mainly attributable to liquids production as we were able to increase liquids for the period by approximately 50% or over 6,500 barrels per day. The 6,500 barrels per day growth in liquids production was about the size of our Permian Basin divestiture in December of 2009. So we've essentially grown our liquids production back to levels that existed prior to the divestiture, while not levering the balance sheet and have put $800 million of divestiture proceeds in our pocket. These results highlight the quality of our asset base and our ability to allocate capital to liquids-rich projects.

Differentials were better than expected this quarter for natural gas at $0.41 per Mcfe and oil at $6.59 per barrel. NGL pricing was positive as well as we realized 45% of NYMEX, and this trend has continued in 2011. Production expense for the quarter was impressive once again as our relentless cost-cutting initiative drove it down to $1.06 per Mcfe or 4% from the same period in 2009. Cash, G&A expense also decreased to $0.29 per Mcfe from $0.42 per Mcfe from last year. Total cash cost for the quarter came in at $2.16 per M compared to $2.44 last year representing a 10% plus reduction. As we like to say, this is a margin business, and the ability to possibly effect and control the cost line item in a rising service cost environment sets Forest apart from its peers.

DD&A increased during the quarter to $1.66 per Mcfe from $1.55 last year. The increase was a result of higher future development costs due to the elevated service cost environment and from our drill bit F&D costs of $1.90 per Mcfe.

Our E&D capital expenditures decreased in the quarter to $118 million from $149 million in Q3, driven by a slowdown in drilling activity as we repositioned our rig fleet for deployment in 2011. For the year, we had E&D capital expenditures of $656 million, which was below guidance of $675 million to $700 million. The ability to control capital has become a calling card for Forest and demonstrates our commitment to efficiently spend capital despite rising service cost.

During the quarter, Forest net debt remained flat at approximately $1.7 billion despite free cash flow of $40 million during the quarter. This was due to our investment in working capital as the majority of our interest on our senior notes is paid in December. Liquidity remains at $1.5 billion as we have an undrawn $1.3 billion borrowing rates and over $200 million of cash on the balance sheet.

Hedging. We increased our 2011 natural gas program to approximately $140 million a day hedged at swaps of $5.54. This completed our 2011 hedging program that resulted in our typical percentage of production hedged at 40% to 50%. We also completed our liquids hedging program with 4,000 barrels of oil hedged at a color of approximately $78 by $89 and hedged 5,000 barrels of NGLs per day at approximately $38.

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