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Denver-based Forest Oil Corporation (FST - Analyst Report) has struck an agreement with a subsidiary of Tristate Midstream II, LLC to divest a lion’s share of its East Texas natural gas gathering assets.

The deal is likely to fetch the company around $34 million. Forest Oil can obtain another $9 million as a payment for additional performance, depending on future activities.

Forest Oil has inked another 10-year natural gas gathering contract with the purchaser, in conjunction with the sale. Per the deal, the company will assign its yield from its existing as well as future operated wells situated within 5 miles of the current configuration of the gathering system.

Forest Oil expects the transaction to close on October 31, 2012, pending customary closing conditions and purchase price adjustments. The funds raised from this sale are likely to be used to pay off a portion of the outstanding borrowings under its bank credit facilities.

Earlier, the company announced plans to trim its spending rate as well as divest non-core properties during the second half of 2012. This is needed to boost its financial strength and flexibility. Forest Oil’s effort to expand its liquid production in order to maximize its margins is also gaining traction.

During the second quarter, although net sales volumes remained flat year over year, the company increased the liquid proportion of its production. During 2011 and early 2012, the company added considerable acreage in the Permian Basin, gaining access to potential oil resources in several oil-bearing pay zones, including the Wolfbone and Wolfcamp Shale plays.

Forest Oil – which completed the spin-off of Lone Pine Resources Inc. in 2011 – holds a Zacks #3 Rank, equivalent to a Hold rating for a period of one to three months. Longer term, we maintain our Neutral recommendation on the stock.

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