Forest Oil Corporation (FST - Analyst Report) plans to trim its spending rate as well as divest non-core properties during the second half of the year. This is needed to boost its financial strength and flexibility.
The company expects its capital expenditure to be between $190 million and $210 million for the second half of the year, down from the spending level of $435 million in the first six months of the year. Forest intends to spend less in lower return liquids projects in East Texas and in the Panhandle area.
Additionally, Denver-based Forest Oil aims to slash costs by reducing the number of rigs to just two from five at present in the Panhandle area by the fourth quarter of 2012. It will also likely have one rig operating in East Texas, compared with the two rigs there at present.
The company added that by the year-end it expects its capital spend run rate to be more or less equivalent to estimated cash flow, based on current commodity prices. This spending adjustment constitutes the first step towards the advancement of Forest’s financial strength and flexibility.
The next step needed to stabilize its financials will depend on identification and divestiture of non-reserve based and non-core assets in the near future. Recently, Forest Oil stated that it expects to offload its properties to get rid of a $1.8 billion debt load.
Forest Oil aims to concentrate on its oil rich play in the central fairway of its Eagle Ford acreage. This was where the company experienced the most convincing results and has the leading, most contiguous block of acreage. Its three new horizontal wells that came on line flowed at an average 24-hour maximum production rate of 787 barrels of oil equivalent per day (BOE/d), and comprised 96% of oil.
Although the company is in discussion with other associates interested in its Eagle Ford properties, the impressive well results coupled with sound economics allows Forest the confidence to move in a ‘go-it-alone plan’ with approximately 40,000 net acres. Based on an 80 acre spending, the company has recognized 500 well locations on the net acreage position which it has determined in the Eagle Ford play.
Forest sees its net sales volumes from its Eagle Ford acreage to be at 3,000 BOE/d by the year-end, up from an average of about 1,000 BOE/d as of June 30, based on a two rig program.
Consistent with the spending cut, the company also expects a lower volume output in the last six months of the year. It now expects its net sales volumes to average between 320–330 million cubic feet equivalent a day (MMcfe/d), compared with an estimated 336 MMcfe/d in the first half of the year.
Again, the company stated that it expects second-quarter sales volumes to be approximately 335 million cubic feet equivalent per day, comprising 68% natural gas and 32% oil and liquids. The volume in the upcoming quarter will experience a negative impact of a fire at Eagle Rock’s Phoenix-Arrington Ranch natural gas processing facility in Hemphill County, Texas.
Although production growth from the Eagle Ford Shale is a key component of Forest Oil’s overall annual upstream growth plans over the next few years, its revenue dropped in the last reported quarter amid a low natural gas price environment.
Forest faces tough competition from SM Energy Company (SM - Analyst Report). We maintain our long-term Neutral recommendation on Forest Oil. The company holds a Zacks #3 Rank (short-term Hold rating).