Forest Oil Corporation (FST)

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Forest Oil (FST)

Q2 2011 Earnings Call

August 02, 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.

Joseph Magner - Macquarie Research

Biju Perincheril - Jefferies & Company, Inc.

David Tameron - Wells Fargo Securities, LLC

John Herrlin - Societe Generale Cross Asset Research

Gil Yang - BofA Merrill Lynch

Pearce Hammond - Simmons & Company International

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 Second Quarter 2011 Earnings Call. [Operator Instructions]

[Audio Gap]

Michael Kennedy

at or around September 30, 2011, on a highlight that we consolidate Lone Pine's results into our financials as we own 82%. However, we also presented our financial results as if the spin-off of Lone Pine had already occurred, which we described as Forest Remainco. There is also few onetime items in our Q2 results that pertain to the Lone Pine transaction. We have provide these as adjustments to our earnings cash flow and EBITDA.

I will first provide a high-level review of our consolidated results and then follow with the more detailed review of Forest Remainco results.

On a consolidated basis, Forest produced 429 million per day, with liquids comprising 26%. This represents a 1% sequential growth in Q1 in total production and 14% sequential growth in liquids or 2,100 barrels per day. Adjusted earnings for the quarter were $41 million or $0.36 per share, with adjusted EBITDA of $176 million and adjusted cash flow $140 million.

The remainder of my remarks will pertain to Forest Remainco only. Forest Remainco produced 335 million a day, with liquids comprising 28% of total production. Adjusted earnings were $33 million or $0.29 per diluted share, with adjusted EBITDA of $142 million and adjusted cash low of $107 million.

Differentials are better than expected this quarter from natural gas at $0.32 per Mcfe, and we actually had a positive differential in the oil side of about $0.79 per barrel. NGL pricing was in line with realizations, 44% of NYMEX.

Production expense for the quarter was $1.30 per Mcfe, with cash G&A expense of $0.33 per Mcfe. G&A remained in line despite administrative cost related to the Lone Pine transaction. DD&A increased during the quarter to $1.72, as our capital program is focused on oil and NGL projects and those products have higher F&D costs in our current DD&A rates.

Our E&D capital expenditures were $193 million. We also invested $52 million in leasehold acquisitions in Q2, adding acreage in the Eagle Ford Shale and Gonzales County and in the Granite Wash. This investment was more than offset by the sale of approximately 11,000 net acres in the Eagle Ford Shale and Wilson County for $110 million.

Forest Remainco's balance sheet was strengthened during the quarter as net debt was reduced by approximately $300 million to $1.4 billion. This was accomplished through the repayment of our intercompany note with Lone Pine and the previously mentioned Wilson County acreage sale.

We entered into a new credit facility during Q2, which matures in June of 2016, with an initial borrowing base of $1.25 billion. There are no amounts outstanding on this facility, and we had cash of $474 million as of June 30, 2011. The undrawn facility and cash on hand results from liquidity in excess of $1.7 billion.

We are well-hedged for the remainder of 2011 and 2012. As a reminder, all the hedges I will discuss relate to Forest Remainco. Loan Pine has a separate hedge portfolio that they put in place subsequent to the IPO date. So for Forest Remainco, on the natural gas side, we have 150 million a day or approximately 64% of guided production hedged at $5.48 for the remainder of 2011 and 105 million a day hedged at $5.30 for 2012.

So to summarize. Q2 2011 saw a steady increase on our liquids volume. We have a strong balance sheet and have the capital required to develop our significant acreage positions in our liquids plays in the Granite Wash, Eagle Ford and Wolfcamp Shale.

With that, I will now turn the call over to J.C. for his review of the second quarter operational results.

John Ridens

Thanks, Mike. In terms of Q2 E&D CapEx, we spent $193 million in the U.S., drilling a total of 39 wells, most of which were horizontal, with a 100% success rate.

In the Granite Wash, we completely 4 horizontal wells that had averaged 24-hour IPs of over 9 million cubic feet equivalents per day, of which approximately 46% or 700 barrels per day was liquids. With the areas that we are drilling and the results and costs, these are good IPs, but are obviously not as good as our 2010 average, which was exceeding 20 million cubic feet equivalent per day.

The results in the Granite Wash were being affected by the following items: One, our drilling in 2010 was focused in the much deeper Southern area or Wheeler County and comprised only 2 zones, both of which were extremely prolific. In 2011 we dedicated about 1/2 of our rig fleet to Wheeler and half to Hemphill, and you can see that in the mix of Q2 wells as only one well was drilled in the Wheeler County, with the other 3 being in Hemphill County. During this time last year, we had no wells being drilled in Hemphill County.

Number two, we're seeing more activity in tightness and services due to increased levels of activity in the area. Things are pretty tight in this market.

Number three, high line pressure and third-party infrastructure downtime, including liquids extraction, has been a much larger issue this year than last. The result of this on our production was approximately 4 million cubic feet equivalent per day for the second quarter. This has caused us to move drilling activity around to abate some of these issues. And with this problem not being solved in a timely manner, we're now considering gathering alternatives, both from laying our own pipe, which we've already done somewhat in Wheeler County, to bring in a new midstream partner. Other companies in the area have been seeing this issue as well as we compete for the available infrastructure.

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