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Denver-based Forest Oil Corporation (FST - Analyst Report) recently announced its plans to divest all of its South Louisiana assets for $220 million. The name of the buyer, however, was not disclosed by the company.

The properties under consideration produced 20 million cubic feet equivalent per day in the third quarter of 2012 and had 45 billion cubic feet equivalent per day of proved reserves as of December 31, 2011.

Forest Oil expects the transaction to close on November 16, 2012, upon fulfillment of 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 company’s outstanding borrowings under its bank credit facilities.

The company plans to focus on divestiture of its non-core properties to boost its financial strength and flexibility. Also, it intends to update the guidance for fiscal 2012 after the closure of this transaction.

The company commenced a deleveraging plan in early July comprising transactions worth $277 million. It includes an agreement announced by the company in August 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 Corporation is an independent oil and gas company engaged in the acquisition, exploration, production and development of oil and gas properties in North America. The company operates five distinct geographic business units − Canada, Eastern, Southern, Western and International.

We believe Forest Oil's financial leverage remains comparatively higher than peer averages due to the company's recent acquisition activity. We also assert that returning to the growth mode will require external capital, asset sales or a recovery in commodity prices.

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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