Forest Oil in Neutral Lane - Analyst Blog

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On Jan 14 we reiterated our long-term Neutral recommendation on Forest Oil Corporation ( FST ) as it is proactive in expanding its liquid production and growing its upstream presence. However, the tepid gas price scenario keeps us on the sidelines. The stock retains a Zacks Rank #3, which is equivalent to a short-term Hold rating.

Why the Reiteration?

Denver-based independent oil and gas company, Forest Oil's effort to expand its liquid production in order to maximize margin is gaining traction.

The company added considerable acreage in the Permian Basin in 2011 and early 2012, giving it access to potential oil resources in several oil-bearing pay zones, including the Wolfbone and Wolfcamp Shale plays. Production forecast for the second half of 2012 is mainly centered on oil, which is prudent in the light of weak gas prices.

Forest Oil has a growing upstream presence in the emerging basins of Texas, Canada and Mexico. Production growth from the Eagle Ford Shale is a key component of the company's overall annual upstream growth plans over the next few years.

However, on the flip side, the company has a highly gas-weighted reserves/production profile (natural gas accounted for more than 66% of total production in the third quarter of 2012) and exposure to the inherently cyclical and volatile exploration and production sector. This is not helped by its highly levered balance sheet. Long-term debt (including current portion) stood at $2,092.4 million, representing a debt-to-capitalization ratio of 89.6% at the end of the third quarter.

The company nonetheless is intent on divesting its non-core properties to boost financial strength and flexibility. We believe this will eventually allow the company to aggressively pursue growth opportunities in its plays and provide meaningful upside potential for investors.

We witnessed no earnings momentum for the stock over the last 60 days for the fourth quarter as well as 2012. The Zacks Consensus Estimates for the fourth quarter and full year 2012 are currently pegged at 12 cents and 39 cents per share, respectively. This reflects year-over-year decrease of 33.0% and 55.1% for the quarter and full year, respectively.

Other Stocks to Consider

Stocks within the oil and gas sector worth considering are Cabot Oil & Gas Corp ( COG ) and Sunoco Logistics Partners L.P. ( SXL ). Both have attractive prospects and carry a Zacks Rank #1 (Strong Buy).

CABOT OIL & GAS (COG): Free Stock Analysis Report

FOREST OIL CORP (FST): Free Stock Analysis Report

SUNOCO LOGISTIC (SXL): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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