On Sep 1, 2014, we issued an updated research report on Forest Oil Corporation (FST), an independent oil and gas company engaged in the acquisition, exploration, production and development of oil and gas properties in North America.
The initiatives undertaken by Forest Oil to increase its liquids production are noteworthy. The company’s focus on cost control and the upside from Granite Wash and the Missourian Wash interval position it well to mitigate the weakness in natural gas prices. Forest Oil also has a growing upstream presence in the emerging basins of Texas, Canada and Mexico.
The company’s effort to increase its liquid production in order to maximize its margin is gaining traction. Forest Oil already added considerable acreage in the Permian Basin, which enabled it to access potential oil resources in several oil-bearing pay zones, including the Wolfbone and Wolfcamp Shale plays.
The company is actively engaged in asset acquisitions as well as divestitures. Forest Oil’s merger with Sabine Oil & Gas, scheduled for closure in the fourth quarter, is likely to create one of the industry’s major East Texas players. This will help the company augment its earnings going forward.
Production growth from the Eagle Ford Shale and Panhandle area is a key focus that forms part of the company’s overall annual upstream growth plans over the next few years. In this respect, management announced a plan for greater concentration on these two regions. The company is shifting its attention toward higher-margin oil development, which will help counter any further fall in gas and natural gas liquid (NGL) volume and prices.
However, we believe that Forest Oil's financial leverage remains comparatively higher than peer averages owing to its recent acquisition activities. We also believe that return to growth will require external capital, asset sales or a rise in commodity prices.
Forest Oil has lowered its full-year production and capex guidance owing to lower activities in the second half of 2014, ahead of the merger completion with Sabine Oil & Gas in the fourth quarter. The company’s guidance has been cut to 105–110 MMcfe/d from its earlier estimate of 120–130 MMcfe/d.
Forest Oil’s limited international exposure makes it a less geographically diversified company compared to other industry players. However, any potential disruption in its operating regions will adversely affect the company’s results.
Other Stocks to Consider
At present, Forest Oil carries a Zacks Rank #3 (Neutral). Some better-ranked stocks in the same industry include PetroChina Co. Ltd (PTR), Valero Energy Partners LP (VLP) and Sunoco Logistics Partners L.P (SXL). All of these stocks sport a Zacks Rank #1 (Strong Buy).
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