Forest Oil Corp. (FST)

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Forest Oil (FST)

Q1 2011 Earnings Call

May 03, 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

Scott Hanold - RBC Capital Markets, LLC

Brian Singer - Goldman Sachs Group Inc.

Biju Perincheril - Jefferies & Company, Inc.

Andrew O'Connor - Millennium Partners

Gil Yang - BofA Merrill Lynch

Pearce Hammond - Simmons & Company International

Duane Grubert - Susquehanna Financial Group, LLLP

Andrew Coleman - Madison Williams and Company LLC

Unknown Analyst -

Presentation

Operator

Good afternoon. My name is Kristen, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Forest Oil First Quarter Earnings Conference Call. [Operator Instructions] At this time, I would like to turn the call over to our host, Mr. Patrick Redmond. Please go ahead.

Patrick Redmond

Thank you, and good afternoon. I want to thank you all for participating in our first quarter 2011 earnings conference call. I will note that the replay of this conference call will be available through May 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 website and can be viewed by clicking on 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 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. Thanks to everyone joining us on a busy earnings day. First quarter 2011 production of 425 million per day was up 6% organically from the same quarter last year. As forecasted, production was affected during the quarter by the repositioning of our drilling program in the Texas Panhandle and down time associated with severe winter weather. Liquids production during the quarter was up 9% organically from last year and comprised 25% of total production. This occurred despite any material production contribution from the Eagle Ford Shale or the Peace River Arch programs, with those wells coming on after March 31. The results from both of these programs are positive and bode well for increased oil production beginning in Q2 and the remainder of 2011.

Differentials were better than expected this quarter for natural gas at $0.38 per Mcfe and for oil at $5.13 per barrel. NGL pricing was positive as well as we realized 44% of NYMEX, and that percentage continues to increase in the second quarter. Production expense for the quarter was $1.34 per Mcfe, up 11% compared to last year. The increased production expense was up mainly due to Canadian foreign exchange and winter weather-related costs and should come down during the remainder of the year.

Cash G&A expense for the quarter was $0.36 per Mcfe and was consistent with last year. DD&A increased during the quarter to $1.76 per Mcfe, as our capital program is almost completely focused on oil and NGL projects, and those projects have higher F&D costs in our current DD&A rates.

Our E&D capital expenditures of $208 million, as expected, was disproportionately weighted towards the first quarter, as our activity in Canada has performed in the winter months before spring break-up occurs. The U.S. business units only spent $130 million on E&D CapEx during the quarter.

We also invested $55 million in acreage in the United States with the addition of 4,000 net acres in our significant Eagle Ford Shale position and 82,000 net acres in new oil-rich opportunities.

Our balance sheet remains strong during the quarter, with net debt at $1.7 billion. Forest borrowing base was reaffirmed in April of 2011 at $1.3 billion, and we have over $150 million of cash on the balance sheet, which results in liquidity of approximately $1.5 billion. We increased our hedge positions during the quarter for both 2011 and 2012. We added to our 2011 gas hedge position and now have 150 million a day hedged at $5.48. This represents a hedge position of 45% of our midpoint gas guidance for the year. We commenced our 2012 gas hedging program by entering into 105 million per day of natural gas hedges at $5.30 per unit. We also entered in the 2,000 barrels per day of NGL hedges for 2012 at approximately $45 per barrel. These are attractive levels for us considering we have realized much lower NYMEX prices over the past year.

So to summarize, Q1 2011 was a bit of a transition quarter, with the redesign of the Texas Panhandle program and commencement of our drilling programs in the Eagle Ford Shale and Peace River Arch. With positive results from the oil drilling, we should see increased oil production in Q2 and throughout 2011.

With that, I'll now turn the call over to Craig.

H. Clark

Okay, thanks, Mike, and thanks for joining us today. We kind of had a lackluster quarter in the first quarter with the weather conditions and other things, both in the U.S. and Canada. February and early March were especially tough. Despite this, we're able to get quite a few positive things done in the quarter, so let's give you the update here. Most notably, we established a proof of concept on our Eagle Ford Shale play with 4 completions averaging about 780 barrels a day equivalents. 730 barrels a day is pure crude oil in those. These all exceeded our medium type curve. We'll be continuing our program here and adding a third lantern rig. As you'll hear from J.C. in a moment, in his operations comment, these oil wells are hanging in there pretty well. We like this play more and more each day.

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