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Message: Forest Oil's Results
Forest Oil Announces Third Quarter 2008 Results; Continues to Control Cash Costs
Net sales volumes increased 3% sequentially from second quarter 2008 to 520 MMcfe/d; Forest expects 12% sequential increase in the fourth quarter to 575 -- 590 MMcfe/d
Last update: 9:36 p.m. EST Nov. 3, 2008
DENVER, Nov 03, 2008 (BUSINESS WIRE) -- --Adjusted net earnings per share in third quarter increased 54% to $1.29 per share compared to third quarter 2007
--Adjusted EBITDA in third quarter increased 30% to $337 million compared to third quarter 2007
--Adjusted discretionary cash flow in third quarter increased 37% to $306 million compared to third quarter 2007
--Total cash costs per-unit in third quarter remained consistent with third quarter 2007 at $2.50 per Mcfe
Forest Oil Corporation (FST:
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FST 25.84, -3.37, -11.5%) (Forest or the Company) today announced financial and operational results for the third quarter of 2008. For the quarter ended September 30, 2008, the Company reported the following highlights:
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-- Net sales volumes increased 3% sequentially to 520 MMcfe/d despite 16 MMcfe/d of deferred production in the quarter due to fall 2008 hurricanes and third party downstream pipeline disruptions
-- Adjusted net earnings of $113.2 million, up 55% over $73.0 million in third quarter 2007, on revenues of $474.2 million
-- Adjusted EBITDA of $336.7 million, up 30% over $259.3 million in third quarter 2007
-- Adjusted discretionary cash flow of $305.7 million, up 37% over $223.3 million in third quarter 2007
H. Craig Clark, President and CEO, stated, "Forest continues to perform along the tenets of its stated operational and financial goals for 2008, growing the Company's 2008 production organically while continuing to focus on costs and spending near our cash flow levels. Forest will continue to fund the projects that provide optimal rates of return even in lower gas price environments, while controlling costs to enhance shareholder value. Forest's significant inventory of low-cost, low-risk tight gas sand opportunities and acreage positions it well versus its peers. Many of our competitors have focused their capital solely on more expensive shale gas plays that could take years to gain the efficiencies already proven in tight gas sand development.
Forest's credit capacity and liquidity remains strong. Forest had approximately $575 million in liquidity under its existing $1.8 billion credit facilities at September 30, 2008, and our lenders recently reaffirmed their $1.8 billion commitment level. Forest will continue to prudently manage its balance sheet and intends to execute a focused development drilling plan that will approximate discretionary cash flow in 2009."
THIRD QUARTER 2008 RESULTS
For the three months ended September 30, 2008, Forest reported net earnings of $429.0 million or $4.88 per basic share. This compares to Forest's net earnings of $58.0 million or $.67 per basic share in the corresponding period in 2007. Net earnings for the three months ended September 30, 2008 were affected by the following items:
-- The non-cash effect of net unrealized gains relating to recording derivative instruments, totaling $498.2 million ($317.4 million net of tax)
-- The non-cash effect of unrealized losses on other investments and unrealized foreign currency exchange losses, totaling $19.2 million ($13.1 million net of tax)
-- Gain on the sale of Gabon assets, totalling $21.1 million ($11.5 million net of tax)
Without the effects of these items, Forest's adjusted net earnings were $113.2 million or $1.29 per basic share. This is an increase of 55% over Forest's adjusted net earnings of $73.0 million or $.84 per basic share in the corresponding 2007 period.
Forest's adjusted EBITDA increased 30% for the three months ended September 30, 2008 to $336.7 million compared to adjusted EBITDA of $259.3 million in the corresponding 2007 period. Forest's adjusted discretionary cash flow increased 37% for the three months ended September 30, 2008 to $305.7 million compared to adjusted discretionary cash flow of $223.3 million in the corresponding 2007 period.
The significant increase in adjusted net earnings, adjusted EBITDA and adjusted discretionary cash flow was primarily due to higher per-unit price realizations for the three months ended September 30, 2008 compared to the corresponding 2007 period.
Net Sales Volumes, Average Realized Prices, and Revenues
Three Months Ended September 30, 2008
Gas (MMcf/d) Oil (MBbls/d) NGLs (MBbls/d) Total (MMcfe/d)
Net sales volumes
United States 325.5 9.8 9.1 439.0
Canada 63.1 2.2 0.8 81.3
Totals 388.6 12.0 9.9 520.3
Average realized prices (1)
United States $ 8.54 116.25 54.60 10.06
Canada 6.97 105.65 77.12 9.06
Totals $ 8.28 114.30 56.41 9.91
Revenues (in thousands)
United States $ 255,627 105,209 45,648 406,484
Canada 40,464 21,659 5,630 67,753
Totals $ 296,091 126,868 51,278 474,237
(1) Average realized prices do not include the effects of natural gas and oil derivative contracts.
For the three months ended September 30, 2008, Forest's average oil and gas net sales volumes were 520 MMcfe/d, representing a 2% increase over 508 MMcfe/d (excluding Alaska) in the corresponding 2007 period. The net sales volumes for the three months ended September 30, 2008 were impacted by Forest's divestiture activities, which represented a loss of 5 MMcfe/d, and deferred production resulting from hurricanes and third party pipeline disruptions of 16 MMcfe/d.
Forest's price differential to NYMEX for natural gas was $1.98 per Mcf for the three months ended September 30, 2008 compared to $.81 per Mcf in the corresponding 2007 period. Average realized prices for natural gas were $8.28 per Mcf for the three months ended September 30, 2008 compared to $5.35 per Mcf in the corresponding 2007 period. The larger price differential was a result of higher NYMEX prices, as well as pipeline and plant disruptions caused by hurricanes for the three months ended September 30, 2008.
Forest's price differential to NYMEX for oil and condensate was $3.83 per Bbl for the three months ended September 30, 2008 compared to $4.35 per Bbl in the corresponding 2007 period. Average realized prices for oil and condensate were $114.30 per Bbl for the three months ended September 30, 2008 compared to $70.75 per Bbl in the corresponding 2007 period.
Forest's average realized prices for natural gas liquids were $56.41 per Bbl, or 48% of NYMEX oil prices, for the three months ended September 30, 2008 compared to $39.36 per Bbl, or 52% of NYMEX oil prices, in the corresponding 2007 period.
Total Cash Costs
Total cash costs per-unit for the three months ended September 30, 2008 remained consistent with the corresponding 2007 period at $2.50 per Mcfe.
Forest's oil and gas production expense per-unit increased 5% for the three months ended September 30, 2008 to $1.53 per Mcfe compared to $1.46 per Mcfe in the corresponding 2007 period. The increase in production expense per-unit was a result of higher production and property taxes per-unit as a result of higher commodity prices. Production and property taxes per-unit increased 44% for the three months ended September 30, 2008 to $.49 per Mcfe compared to $.34 per Mcfe in the corresponding 2007 period. The increase was partially offset by the divestiture of the high operating cost Alaska assets in August 2007 and successful cost control initiatives.
Forest's general and administrative expense per-unit, excluding stock-based compensation expense, decreased slightly for the three months ended September 30, 2008 to $.28 per Mcfe compared to $.29 per Mcfe in the corresponding 2007 period.
Forest's interest expense decreased 7% for the three months ended September 30, 2008 to $30.4 million, or $.64 per Mcfe, compared to $32.6 million, or $.68 per Mcfe, in the corresponding 2007 period due to the repayment in full of the Forest Alaska Operating LLC term loans in August of 2007.
Forest's current income tax expense per-unit decreased 14% for the three months ended September 30, 2008 to $.06 per Mcfe compared to $.07 per Mcfe in the corresponding 2007 period. In the three months ended September 30, 2008, current tax expense reflects $3.1 million of tax related to the sale of the Company's assets in Gabon.
Depreciation and Depletion Expense
Forest's depreciation and depletion expense per-unit increased 13% for the three months ended September 30, 2008 to $2.86 per Mcfe compared to $2.54 per Mcfe in the corresponding 2007 period. The increase was primarily due to price-related downward reserve revisions at September 30, 2008 caused by a significant increase in basis differentials in the Mid-Continent area.
Exploration and Development Capital Expenditures
Forest invested $398.8 million in exploration and development activities (excluding capitalized interest, equity compensation and asset retirement obligations) for the three months ended September 30, 2008. This compares with $225.4 million spent in the third quarter of 2007 and $294.3 million spent in the second quarter of 2008.
NATURAL GAS AND OIL DERIVATIVES
As of November 3, 2008, Forest had natural gas and oil derivatives in place for 2008, 2009 and 2010 covering the aggregate average daily volumes and weighted average prices shown below. None of these natural gas and oil derivatives contain knock-out provisions that would cause a derivative to cease to exist at prices below an established threshold. Forest's bank group is comprised entirely of commercial banks. These banks or their affiliates are also Forest's primary derivative counterparties. During the fourth quarter of 2008 Forest terminated 20.0 Bbtu/d of natural gas swaps for 2009 and 20.0 Bbtu/d of natural gas collars for 2009 to balance Forest's credit exposure amongst its bank group. Forest received $19.2 million of proceeds related to these terminations. The effects of these terminations have been included in the table below.
Remainder 2009 2010
2008
Natural gas swaps:
Contract volumes (Bbtu/d) 70.0 (1) 90.0 -
Weighted average price (per MMBtu) $ 9.02 9.34 -
Natural gas collars:
Contract volumes (Bbtu/d) 110.0 (1) 20.0 -
Weighted average ceiling price (per MMBtu) $ 9.18 11.28 -
Weighted average floor price (per MMBtu) $ 7.51 8.50 -
Oil swaps:
Contract volumes (MBbls/d) 6.5 4.5 1.5
Weighted average price (per Bbl) $ 69.72 69.01 72.95
(1) 10.0 of the 70.0 Bbtu/d of natural gas swaps and 30.0 of the 110.0 Bbtu/d of natural gas collars are subject to a put of $6.00 per MMBtu.
OPERATIONAL PROJECT UPDATE
CORE AREAS
The Core Area assets (Greater Buffalo Wallow Area, Ark-La-Tex, South Texas and the Alberta Deep Basin) constituted 70% of Forest's net sales volumes and 63% of capital expenditures for the three months ended September 30, 2008. These assets are primarily large tight-gas sand development projects. Forest employed 35 rigs in these areas alone during the third quarter of 2008 compared to 27 rigs in the first quarter of 2008. Current plans are to reduce the rig count employed in the Core Areas by year end 2008. Net sales volumes from these assets were up 6% sequentially to 362 MMcfe/d in the third quarter of 2008 compared to 342 MMcfe/d in the second quarter of 2008.
Greater Buffalo Wallow Area -- Texas Panhandle (66 -- 100% WI) -- During the third quarter of 2008, a total of 20 wells were drilled, with a 100% success rate. The initial rates for these wells ranged from approximately 2.4 to 10.7 MMcfe/d, with an average of 4.9 MMcfe/d. Forest drilled its best vertical well in the area to date during the quarter with an initial rate of 10.7 MMcfe/d.
East Texas/North Louisiana Area (52 -- 100% WI) -- During the third quarter of 2008, a total of three Cotton Valley horizontal wells were completed on its acreage with one well initially producing 9.9 MMcfe/d (Forest's best Cotton Valley horizontal well to date), and for the three wells, an average initial rate of 6.0 MMcfe/d. Since inception of this program in 2007, Forest has drilled 12 horizontal Cotton Valley wells that have yielded average initial gross production rates of 5.4 MMcfe/d. Forest currently has three horizontal Cotton Valley rigs running in its East Texas/North Louisiana play.
Deep Basin Area, Wild River, Sundance/Ansell and Hinton (25 -- 100% WI) -- During the third quarter of 2008, a total of 11 wells have been drilled, with a 100% success rate with initial rates on these wells ranging from 1.0 to 7.0 MMcfe/d. Based on previous completions in the field, Forest identified a horizontal completion opportunity in a previously untested horizontal zone that tested 4.6 MMcfe/d. Forest expects to continue to evaluate horizontal opportunities in 2008 and 2009.
NEW FRONTIER PROGRAM
Utica Shale (60 -- 100% WI) -- Forest has drilled all three horizontal wells and is on schedule with its previously announced plan to commence fracture stimulating wells in the fourth quarter of 2008. Results of Forest's drilling program are expected to be available by year end 2008. After the completion of the 2008 horizontal drilling and fracture stimulation program, and assuming favorable test results, Forest expects to commence a pilot horizontal program in 2009 with full scale development expected to begin in 2010.
Haynesville/Bossier Shale (52 -- 100% WI) -- Forest is testing the Haynesville/Bossier shale on its acreage and plans to drill or deepen a total of 16 vertical wells in 2008 to the shale and use the data from those wells to support drilling two to three horizontal wells before year end, one of which is currently drilling. Through the end of the third quarter of 2008, a total of 10 Haynesville/Bossier vertical shale wells (some commingled with Cotton Valley) have been drilled, with a 100% success rate. Initial rates on these wells ranged from 1.5 to 4.4 MMcfe/d. A stand alone vertical Haynesville/Bossier well was put on line in the third quarter at 4.4 MMcfe/d, Forest's best East Texas/North Louisiana vertical well to date.
Greater Vermejo/Haley Delaware Basin -- West Texas (42 -- 100% WI) -- During the third quarter of 2008, Forest completed its first well in the 2008 program yielding an initial production rate of 7.2 MMcfe/d following successful 3D seismic interpretation in the field. A second well is currently being completed and production is expected to begin before the end of the year. A third deep exploratory well is expected to spud in late December 2008.
PROPERTY ACQUISITIONS
Forest completed its previously announced acquisition from Cordillera Texas, L.P. of producing assets, including approximately 118,000 gross acres (85,000 net acres), located in its Greater Buffalo Wallow and East Texas/North Louisiana Core Areas with significant development potential. The assets produced an average of approximately 34 MMcfe/d in the first half of 2008 and, based on Forest's internal estimates, contain 350 Bcfe of estimated proved reserves. Since the date of the acquisition, September 30, 2008, Forest has completed two notable wells on the properties, one vertical well north of Buffalo Wallow at 3 MMcfe/d and one horizontal well in East Texas at 4 MMcfe/d. Forest will evaluate horizontal drilling opportunities on the entire property base using our expertise gained in East Texas/North Louisiana.
PROPERTY DIVESTITURES
For the nine months ended September 30, 2008, Forest has sold low growth, primarily non-operated assets with combined net production of approximately 5 MMcfe/d and estimated proved reserves of 16 Bcfe at December 31, 2007 for proceeds of approximately $100 million, including the sale of all of our unproven oil and gas properties in Gabon for proceeds of approximately $24 million.
As previously announced, Forest entered into an agreement to sell certain operated and non-operated properties in the Rockies, including its Niobrara and San Juan properties and various other properties in Wyoming and Utah, for $258 million. At the instigation of the counterparty to the transaction, Forest is currently in discussions that may result in modifications to the transaction's terms.
The Company also announced a desire to sell an additional $450 -- 750 million of assets. Given the challenging credit environment, this goal may be unlikely to be achieved on the original timetable. However, we intend to continue to pursue additional asset sales as markets improve.
UPDATED 2008 GUIDANCE
The guidance below represents Forest's updated price differential guidance for the three months ending December 31, 2008. Except as indicated below, all other guidance detailed in Forest's press releases dated February 21, 2008, May 2, 2008, and September 30, 2008 has not changed.
The following guidance is subject to all of the cautionary statements and limitations described in Forest's press release dated February 21, 2008 and below, under the headline "Forward-Looking Statements".
Price Differential: Based on current prices, Forest expects the natural gas price differential for the remainder of 2008 will average $1.40 to $1.70 per MMbtu less than the NYMEX Henry Hub price.
Based on current prices, Forest expects the oil and condensate differential for the remainder of 2008 will average $4.00 to $6.00 per Bbl less than the NYMEX West Texas Intermediate (WTI) price.
Based on current prices, Forest expects the realized price for natural gas liquids for the remainder of 2008 will average 50% of the NYMEX WTI price.
NON-GAAP FINANCIAL MEASURES
In addition to net income determined in accordance with generally accepted accounting principles (GAAP), Forest has provided net earnings adjusted for certain items, a non-GAAP financial measure, which facilitates comparisons to earnings forecasts prepared by stock analysts and other third parties. Such forecasts generally exclude the effects of items that are difficult to predict or to measure in advance and are not directly related to Forest's ongoing operations. A reconciliation between GAAP net earnings and net earnings adjusted for certain items is provided in the paragraphs on page two of this release in which the non-GAAP measure is presented. Net earnings excluding the effects of certain items should not be considered a substitute for net earnings as reported in accordance with GAAP.
In addition to reporting net earnings as defined under GAAP, Forest also presents adjusted EBITDA, which consists of net earnings plus income tax expense; unrealized (gains) losses on derivative instruments, net; unrealized foreign currency exchange losses (gains); unrealized losses (gains) on other investments, net; realized foreign currency exchange gains; interest expense; write-off of unamortized debt costs and prepayment premiums; accretion of asset retirement obligations; depreciation and depletion; gain on sale of assets; and stock-based compensation. Further, Forest presents adjusted discretionary cash flow, which consists of adjusted EBITDA minus interest expense; write-off of unamortized debt costs and prepayment premiums; current income tax expense; and other. Management uses adjusted EBITDA and adjusted discretionary cash flow as measures of operational performance. Adjusted EBITDA and adjusted discretionary cash flow should not be considered as alternatives to net earnings as reported under GAAP. The following is a reconciliation of net earnings to adjusted EBITDA to adjusted discretionary cash flow (in thousands):
Three Months Ended
September 30,
2008 2007
Net earnings $ 429,007 57,987
Income tax expense 233,942 29,048
Unrealized (gains) losses on derivative instruments, net (498,182 ) 12,415
Unrealized foreign currency exchange losses (gains) 4,456 (1,075 )
Unrealized losses (gains) on other investments, net 14,699 (2,521 )
Realized foreign currency exchange gains - (4,895 )
Interest expense 30,429 32,567
Write-off of unamortized debt costs and prepayment premiums - 9,010
Accretion of asset retirement obligations 1,871 1,980
Depreciation and depletion 136,731 122,005
Gain on sale of assets (21,063 ) -
Stock-based compensation 4,820 2,763
Adjusted EBITDA 336,710 259,284
Interest expense (30,429 ) (32,567 )
Write-off of unamortized debt costs and prepayment premiums - (9,010 )
Current income tax expense (2,961 ) (3,320 )
Other 2,425 8,960
Adjusted discretionary cash flow $ 305,745 223,347
Total Cash Costs
Total cash costs is a non-GAAP measure calculated in accordance with oil and gas industry standards that is used by management to assess the Company's cash operating performance. Total cash costs is defined as all cash operating costs, including production expense; general and administrative expense (excluding stock-based compensation); interest expense; and current income tax expense.
Three Months Ended September 30,
2008 Per Mcfe 2007 Per Mcfe
(In thousands, except per-unit amounts)
Production expense $ 73,268 1.53 70,145 1.46
General and administrative expense (excluding stock-based 13,226 0.28 13,953 0.29
compensation of $4,820 and $2,763, respectively)
Interest expense 30,429 0.64 32,567 0.68
Current income tax expense 2,961 0.06 3,320 0.07
Total cash costs $ 119,884 2.50 119,985 2.50
TELECONFERENCE CALL
A conference call is scheduled for Tuesday, November 4, 2008, at 12:00 PM MT to discuss the release. You may access the call by dialing toll free 800.399.6298 (for U.S./Canada) and 706.634.0924 (for International) and request the Forest Oil teleconference (ID # 70171358). A Q&A period will follow.
A replay will be available from Tuesday, November 4 through November 11, 2008. You may access the replay by dialing toll free 800.642.1687 (for U.S./Canada) and 706.645.9291 (for International), conference ID # 70171358.
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