Forest Oil Corporation (FST)

FST 
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Forest Oil (FST)

Q3 2011 Earnings Call

November 01, 2011 2:00 pm ET

Executives

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

Michael N. Kennedy - Chief Financial Officer and Executive Vice President

John C. Ridens - Chief Operating Officer and Executive Vice President

Patrick J. Redmond - Vice President of Corporate Planning and Investor Relations

Analysts

Pearce W. Hammond - Simmons & Company International, Research Division

Brian Singer - Goldman Sachs Group Inc., Research Division

Andrew Coleman - Raymond James & Associates, Inc., Research Division

Brian Hunsaker

Biju Z. Perincheril - Jefferies & Company, Inc., Research Division

Jessica Chipman - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Scott Hanold - RBC Capital Markets, LLC, Research Division

Gil Yang - BofA Merrill Lynch, Research Division

Brian L. Kuzma - Weiss Multi-Strategy Advisers, LLC

Unknown Analyst -

David Heikkinen - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

David R. Tameron - Wells Fargo Securities, LLC, Research Division

Presentation

Operator

Hello, my name is Philip, and I will be your conference operator today. At this time, I would like to welcome everyone to the Forest Oil Third Quarter 2011 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Mr. Patrick Redmond. Sir, you may begin.

Patrick J. Redmond

Thank you. Good afternoon. I want to thank you for participating in our third quarter 2011 earnings conference call. I will note that a replay of this conference call will be available through November 15 as described in our press release issued yesterday. We have, joining us on the call 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 operating and 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, forecasts, projects, estimates, anticipates, et cetera, 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.

We'll now turn the call over to Michael Kennedy. Thank you.

Michael N. Kennedy

Thanks, Pat, and thanks, everyone, joining us today. The third quarter of 2011 was highlighted by the completion of our spinoff of Lone Pine resources to our shareholders. On September 30, 2011, Forest distributed its ownership of 82% of Lone Pine's shares to its shareholders, which resulted in Forest shareholders receiving 0.612 of a share of Lone Pine for every Forest share held. This transaction provided another meaningful dividend to our shareholders in a tax-efficient manner and still allows them to have exposure to The Lone Pine's high-quality asset base in Canada.

We have accounted for ownership in Lone Pine during the third quarter as discontinued operations in our financial statements. We've also provided our results excluding Lone Pine from Q3 in comparable periods. In my remarks today, I will first briefly cover our earnings including Lone Pine and then my remaining comments will pertain to Forest excluding Lone Pine. We have noted that our analysts have modeled our results using different methods. Hopefully, we are presenting them in a fashion that is useful to everyone.

Including our ownership and interest in Lone Pine, our adjusted net earnings were $37 million or $0.32 per diluted share. Adjusted EBITDA was $173 million and adjusted discretionary cash flow was $134 million. These figures are net to our 82% ownership during the quarter. The remainder of my remarks will now relate to Forest excluding Lone Pine.

Forest produced 323 million per day, including 14,400 barrels per day of liquids during the quarter. This is below our expectations due to third-party infrastructure issues in the Texas Panhandle that resulted in production downtime of 10 million a day in the quarter. Adjusted earnings came in at $29 million or $0.25 per share with adjusted EBIT of $142 million and adjusted cash flow of $106 million.

Differentials for natural gas were $0.33 per Mcfe, and oil was a positive differential of $2.11 per barrel. NGL pricing was approximately 50% of NYMEX. Differentials continue to be better than expected. Production expense for the quarter was also better than expected at $1.16 per Mcfe, which was an 11% sequential decrease. The SG&A remained in line at $11 million or $0.37 per Mcfe. DD&A increased as expected to $1.83 per Mcfe as our capital program is focused on liquids projects, and those projects have higher F&D cost than our current the DD&A rates. Our E&D capital expenditures were in line with guidance at $182 million. We also invested $76 million in leasehold acquisitions as we continue to bolster our liquids acreage in the Panhandle, Eagle Ford Shale and Permian basin. The latest round of leasehold acquisitions have provided us with a significant opportunity set that we'll be evaluating for the remainder of 2011 and into 2012 through the drill bit. We do not anticipate material, undeveloped leasehold acquisitions going forward into 2012.

Our net debt as predicted increased to $1.6 billion. We recently had our borrowing base reaffirmed at $1.25 billion, no amounts drawn and have $270 million of cash, which results in approximately $1.5 billion of liquidity.

We are well ahead for the remainder of 2011 and 2012 with $150 million a day hedged at $5.48 for 2011 and $105 million per day hedged at $5.30 for 2012. Also, we provided an update for our guidance for production and differentials. We are guiding production at $335 million per day to $345 million per day for Q4, assuming no improvement in the third-party infrastructure issues, which represents a 5% sequential organic growth rate sponsored by the recent wells that will be highlighted later in the call. We also narrowed our differentials to account for the strong product pricing we have recently realized.

So to summarize, Q3 2011 was a transitional quarter as we completed the spinoff of Lone Pine and got our first results from testing some new oil concepts. As we discussed at midyear, we saw value from our portfolio of assets through focusing on our oil- and liquids-bearing plays. However, to realize this value, we indicated a significant amount of science capital would need to be deployed. This science capital is expected to be focused in 2011 and is not expected to be replicated in 2012, which will result in total capital expenditures more in line with cash flow in 2012.

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