Denver-based Forest Oil Corporation’s (FST) third quarter 2011 earnings from continuing operations of 25 cents per share (excluding non-recurring items) missed the Zacks Consensus Estimate by a penny. The quarterly earnings were well below the year-earlier numbers of 32 cents.
The lackluster performance was mainly due to the lower natural gas price realization and net sales volumes, which were partially offset by the higher oil and natural gas liquids prices.
Total revenue in the reported quarter was marginally down at $174.1 million from the year-ago level of $175.2 million, and came nowhere near the Zacks Consensus Estimate of $223 million.
Operational Performance
Net sales volumes shrunk 29.3% year over year to 323.2 million cubic feet equivalent per day (MMcfe/d) in the reported quarter, mainly due to production downtime in the Texas Panhandle associated with third party infrastructure issues.
The average equivalent price per Mcf (including the effect of hedging) was $6.14, up from the year-ago realization of $5.64. Average realized natural gas price was $4.68 per Mcf, down 1.3% from the comparable prior-year quarter, while average realized oil price was $89.77 per barrel, up 25.6% from the year-ago quarter. Natural gas liquids (NGLs) were sold at $34.12 per barrel, up 9% from third quarter 2010.
During the quarter, production expenses increased 2.7% year over year to $1.16 per Mcfe. Unit general and administrative expenses increased 12.1% year over year to 37 cents per Mcfe. Depreciation and depletion expenses per unit increased 32% to $1.83 per Mcfe from $1.39 per Mcfe in the corresponding 2010 quarter.
Financials
At quarter end, Forest had $270.1 million of cash and cash equivalents with $1,872.1 million of long-term debt, representing a debt-to-capitalization ratio of 61.4% (up from 57.7% at the end of second quarter 2011).
Guidance
Forest expects net sales volume of 335–345 MMcfe/d for the fourth quarter of 2011, assuming no improvement in production downtime in the Texas Panhandle. Net sales volumes would comprise approximately 70% natural gas and 30% liquids.
Lone Pine Spin-off
During the reported quarter, the company completed the spin-off of Lone Pine Resources Inc. (LPR). Subsequent to the initial public offering of Lone Pine on June 1, 2011, Forest owned approximately 82% of the outstanding shares of Lone Pine's common stock.
On September 30, 2011, Forest distributed, or spun off, its remaining ownership in Lone Pine in the form of a pro rata common stock dividend to all Forest shareholders of record as of the close of business on September 16, 2011 (the Record Date). Forest shareholders received 0.61248511 of a share of Lone Pine common stock for every share of Forest common stock held as of the close of business on the record date.
Outlook
We like Forest Oil’s initiatives toward increased liquids production. The company’s focus on cost control and the upside from Eagle Ford, Granite Washand Wolfcamp Shale position it well to weather the weakness in natural gas prices.
The company’s drilling results from its new Texas Panhandle oil zones and the Granite Wash "C" zone were well above its expectations, demonstrating strong hydrocarbon potential in the Texas Panhandle from 'new' zones. Forest Oil also aims to continue running a one rig program in each of these zones for the remainder of the year and beyond. Again, we also believe Eagle Ford will soon become Forest Oil’s most active area. The company’s substantial Eagle Ford position is expected to expedite the transition to liquids.
However, with natural gas accounting for approximately 73% of the total production (as of September 30, 2011), Forest Oil is exposed to the tentative outlook of the North American natural gas market. Its operations and cash flow are more sensitive to fluctuations in the market price for natural gas than to fluctuations in the market price for oil and NGLs.
Forest faces tough competition from its peer such as SM Energy Company (SM). Consequently, we maintain our long-term Neutral recommendation for the stock. Forest Oil also holds a Zacks #4 Rank (short-term Sell rating).
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