Forest Oil Remains Evenly Poised

We maintain our long-term Neutral recommendation on Forest Oil Corporation (FST - Analyst Report), an independent oil and gas company engaged in the acquisition, exploration, production and development of oil and gas properties in North America.

Forest Oil has significant acreage in oil rich areas of Eagle Ford, Texas Panhandle, Alberta Nikanassin Sand and Wolfcamp. The line upside from these regions and a focus on cost control position the company well to weather the volatility in gas prices.

We believe Eagle Ford will soon become Forest’s most active area. Forest Oil’s substantial Eagle Ford position is expected to expedite the transition to liquids with the recent completion of an extended 7,500 lateral well with an initial production rate of approximately 1,000 barrels of oil equivalent per day (Boe/d).

Forest Oil also has a growing upstream presence in the emerging basins of Texas, Canada and Mexico. The company’s effort to expand its liquid production in order to maximize its margin is gaining traction. We appreciate the company’s initiative to expand operations in Eagle Ford Shale and start drilling activities in Wolfcamp Shale.

Despite lower natural gas price realization and net sales volumes, the company’s second quarter earnings beat the Zacks estimate, thanks to higher oil and natural gas liquids prices. But the quarter’s earnings failed to meet prior-year results.

However, the recent production results from Granite Wash represent a negative scenario for the near future. With production rates from Forest’s new wells declining persistently, the company is refocusing on testing shallower liquid-rich zones, but results are not expected anytime soon.

Moreover, we remain apprehensive about the company’s lowered production guidance for 2011. Forest Oil expects its full-year output to be 470 million cubic feet equivalent per day (MMcfe/d) versus its prior expectation of 490 MMcfe/d.

We believe Forest Oil will continue to see limited production growth in 2012 and higher-than-peer average financial leverage. As a result, it will be challenging for the company to turn around either operationally or financially. The company also faces threats from Cabot Oil & Gas Corporation (COG - Analyst Report) and Linn Energy LLC (LINE - Snapshot Report).

Read the full analyst report on FST

Read the full analyst report on COG

Read the full analyst report on LINE