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Forest to Unload South Texas Assets

CHK FST

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Denver-based Forest Oil Corporation (FST - Analyst Report) plans to offload its assets in Texas for an after-tax sum of $325 million, which it intends to utilize for paying down debt. However, the name of the buyer was not disclosed by the company.

The South Texas properties under consideration, barring its Eagle Ford Shale oil properties, produced 66 million cubic feet equivalent per day in the third quarter of 2012 and had 272 billion cubic feet equivalent of proved reserves as of December 31, 2011. The natural gas accounts for 86% of the third quarter production and 85% of proved reserves.

The properties also generated $60 million in income during 2012 and Forest Oil expects the transaction to close on February 15, 2013, 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.

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.

The company plans to focus on the divestiture of its non-core properties to boost its financial strength and flexibility. 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.

We like Forest Oil’s initiatives to increase liquids production, like its peer Chesapeake Energy Corporation (CHK - Analyst Report). The company has entered the fourth quarter with five drilling rigs, which are all operating in liquids-rich prospects in its three core development areas that include Panhandle and Eagle Ford.

However, we remain skeptical about its natural gas weighted production level. As natural gas accounted for 66% of the company’s total production in the third quarter of 2012, Forest Oil is exposed to the cautious outlook of the North American natural gas market.

Forest Oil 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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