Forest Oil Corporation (FST)

FST 
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Forest Oil (FST)

Q3 2012 Earnings Call

October 30, 2012 11:00 am ET

Executives

Larry C. Busnardo - Director of Investor Relations

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

Patrick R. McDonald - Chief Executive Officer, President, Director and Member of Executive Committee

Analysts

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

Michael A. Hall - Robert W. Baird & Co. Incorporated, Research Division

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

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

James Spicer - Wells Fargo Securities, LLC, Research Division

Brian T. Velie - Capital One Southcoast, Inc., Research Division

Jeffrey W. Robertson - Barclays Capital, Research Division

Andre Benjamin - Goldman Sachs Group Inc., Research Division

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Q3 2012 Forest Oil Corporation Earnings Conference Call. My name is Alex, and I will be your operator today. [Operator Instructions] As a reminder, this call is being recorded for replay and transcription purposes. I would now like to hand over to Larry Busnardo, Director of Investor Relations. Go ahead, please, sir.

Larry C. Busnardo

Good morning. I want to thank you for participating in our third quarter 2012 earnings conference call. A replay of this call will be available through November 14 and the details are in our press release that was issued yesterday afternoon.

Joining me on the call today is Patrick McDonald, Forest President and Chief Executive Officer; and Michael Kennedy, Executive Vice President and Chief Financial Officer.

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 will be available on our website and be viewed by clicking on the Investor Relations tab, then Non-GAAP at 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, about what will, should or may occur in the future are forward-looking statements. Please carefully review our cautionary language regarding forward-looking statements as it's contained at the end of our press release.

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

Michael N. Kennedy

Thanks, Larry, and thanks to everyone joining us today. I know many people are currently being impacted by the storms back east. They are in thoughts and prayers for quick and safe recovery.

I will focus my comments today on some of the financial highlights for the third quarter as the press release issued yesterday afternoon covers the quarter in good detail.

Third quarter 2012 equivalent production came in at $339 million per day, which was at the high end of the second half guidance of $330 million to $340 million per day. This represents a 5% increase on a year-over-year basis and a 1% increase over second quarter 2012 volumes.

Importantly, our liquids contribution increased to 34% of total production. This compares to 27% in the third quarter of 2011 and is a 25% year-over-year increase and 6% quarter-over-quarter increase. This was driven by an increase in third quarter oil volumes, which increased 29% over the same period last year and 7% higher on a sequential basis as a result of our increased focus on projects targeting the shallower oil zones in the Panhandle Area and our development program in the Eagle Ford.

Note that this growth was accomplished entirely on an organic basis. I would expect that this upward trend on oil volumes should continue as Forest has 4 of its 5 rigs targeting higher-margin oil projects.

Capital spending in the quarter was $166 million as we started the third quarter operating 9 rigs, but we entered the fourth quarter running 5 rigs. This level of activity is consistent with our second half of 2012 budget of $240 million to $260 million, and our spending for the fourth quarter is now closely aligned with our expected cash flow.

We made significant progress towards achieving our goal of improving the company's financial flexibility. The first step was the adjustment of our capital program. Our second step was the earlier-than-anticipated execution of our noncore asset divestiture program.

We announced agreements to sell approximately $277 million in noncore assets during the third quarter. This was highlighted by the announced sale of our Southeast Ana [ph] properties for $220 million. Only $7 million of these divestitures closed in the third quarter. The remaining $270 million is scheduled to close in November.

Pro forma for these pending divestitures, total debt is approximately $1.8 billion. This process continues and we'll keep you updated on our further progress, and we plan to update 2012 guidance after the divestiture closes in mid-November.

Our third step was to opportunistically take advantage of favorable high-yield market conditions in September as we completed a $500 million senior notes offering. Proceeds were used to fund the redemption of half of the outstanding amount due on our 2014 notes. In addition to extending Forest debt maturities, we were able to significantly reduce the refinancing risks related to the 2014 notes.

Our hedge position continues to work in our favor as we realized a 44% uplift to our unhedged realized gas price and a $26 million total gain on our hedges during the third quarter. We continue to selectively add to our hedge portfolio to protect cash flow. We took advantage of the spike in natural gas prices during September to begin hedging our 2014 volumes. We have initially added $40 million a day of swaps at $4.50 and we'll continue to opportunistically add to this position.

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