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Denver-based independent oil and gas company, Forest Oil Corporation (FST - Analyst Report) announced that it would dispose its oil and gas assets located in the Texas Panhandle area. The company will initiate a marketed process to pursue the sale. For this purpose, Forest Oil has retained JPMorgan Chase & Co. (JPM - Analyst Report) to help in the selling process. Forest intends to use proceeds from the sale to reduce debt and enhance financial flexibility.

We like the initiatives undertaken by Forest Oil to increase its liquids production. The company’s focus on cost control and the upside from Granite Wash and the Missourian Wash interval position it well to weather the weakness in natural gas prices. Forest Oil has a growing upstream presence in the emerging basins of Texas, Canada and Mexico.

In its attempt to expand liquids production, Forest Oil has already added considerable acreage in the Permian Basin, getting access to potential oil resources in several oil-bearing pay zones, including the Wolfbone and Wolfcamp Shale plays. Production for the year is expected to average 220–230 million cubic feet equivalent per day (MMcfe/d). The forecast is mainly centered on oil, which should be favorable in light of weak gas prices with liquids comprising 40% of the total production.

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 the total production in the first quarter of 2013) 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 $1,640.4 million, representing a debt-to-capitalization ratio of 46.4% at the end of the first 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.

Forest Oil holds a Zacks Rank #3 (Hold). However, there are other stocks in the oil and gas sector like W&t Offshore Inc. (WTI - Snapshot Report) and PetroQuest Energy Inc. (PQ - Snapshot Report) which hold a Zacks Rank #1 (Strong Buy) and are expected to perform better.
 

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