Forest Oil Adds Permian Acreage

Forest Oil Corporation (FST - Analyst Report) is all set to expand its oily footprint in the Permian Basin. The company has increased its total Permian Basin acreage position to 126,000 gross acres (114,500 net) through the Wolfbone acreage acquisition, significantly widening its presence in the Delaware and Midland Basins.

The total Permian Basin acreage comprises 57,500 gross acres (51,500 net) of Wolfcamp Shale (Midland Basin) in Crockett County, Texas as well as 68,500 gross acres (63,000 net) prospective Wolfbone oil play (Delaware Basin) in Pecos and Reeves Counties, Texas.

Forest paid $66 million of cash for the acreage, which was acquired through a series of transactions. The total consideration also includes approximately 2.7 million shares of Forest Oil’s common stock.

The acquired properties in the Wolfbone acreage are mainly concentrated near the Delaware and Midland Basins, entitling the company to numerous liquid-rich operations, with both vertical and horizontal drilling opportunities. Forest intends to test the Wolfcamp Shale further in the near future and commence testing the Wolfbone in the first half of 2012. Consequently, the company will assess the future pace of drilling rig activity in each of the plays.

Forest Oil’s effort to expand its liquid production in order to maximize its margin is gaining traction. Consequently, the company has been in a restructuring mode in the recent past, being actively engaged in asset acquisitions as well as divestitures.

However, Forest’s highly gas-weighted reserves/production profile and exposure to the inherently cyclical and volatile exploration and production sector offset these strengths and remain key areas of concern, in our view. Forest Oil expects net sales volume of 335–345 million cubic feet equivalent per day (MMcfe/d) for the fourth quarter of 2011, assuming no improvement in production downtime in the Texas Panhandle. Net sales volumes are expected to comprise approximately 70% natural gas and 30% liquids.

The company is following in the footsteps of its bigger peers, like Chesapeake Energy Corp. (CHK - Analyst Report), the second-largest U.S. natural-gas producer, as well as ConocoPhillips (COP - Analyst Report), both of which have been restricting gas production in response to weak natural gas prices. Although increased focus on liquids is commendable, it will take time for Forest Oil to benefit from related ventures.

The company holds a Zacks #3 Rank, which is equivalent to a short-term Hold rating. We maintain our long-term Neutral recommendation for Forest Oil Corporation.

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