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On Oct 3, we reiterated our long-term Neutral recommendation on Forest Oil Corporation (FST - Analyst Report) as it is proactive in expanding 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 efforts to expand its liquid production in order to maximize margin is gaining traction.
 
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.
 
Moreover, the company has already added considerable acreage in the Permian Basin, enabling Forest to access 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 does not get any help from 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 Forest Oil to aggressively pursue growth opportunities in its plays and provide meaningful upside potential for investors.
 
Other Stocks to Consider
 
Stocks within the oil and gas sector worth considering are Devon Energy Corp. (DVN - Analyst Report), Dril-Quip, Inc. (DRQ - Analyst Report) and Resolute Energy Corp. (REN - Snapshot Report). All these look attractive with a Zacks Rank #1 (Strong Buy).

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