Forest Sheds South Texas Assets

Denver-based Forest Oil Corporation ( FST - Analyst Report ) has wrapped up its divestiture plans to offload its assets in Texas for $307 million to Hilcorp Energy I, LP – a subsidiary of Hilcorp Energy Co. The proceeds of the deal, which was announced on Jan 3, is intended to be utilized for paying down debt.

However, the company has held back certain properties which are valued at $14 million. The closing of this asset sale is expected within 90 days.

The South Texas properties, barring its Eagle Ford Shale oil properties, yielded 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 Dec 31, 2011. The property’s natural gas accounted for 86% of the third quarter production and 85% of proved reserves.

The properties also generated $60 million in income during 2012. The funds raised from this sale are likely to be used to pay off a portion of the company's outstanding borrowings.

Denver-based independent oil and gas Forest Oil’s endeavor to expand its liquid production, like its peer Chesapeake Energy Corporation ( CHK - Analyst Report ) , in order to maximize its margin is gaining traction. This latest deal is a part of this effort. Forest’s focus on cost control and the upside from Granite Wash and the Missourian Wash interval position it well to weather the weakness in natural gas prices.

The company is expected to report its fourth quarter as well as full-year 2012 results on Feb 16. Second half 2012 production is guided in the range of 330–340 million cubic feet equivalent per day (MMcfe/d), 66% of which is natural gas. The forecast is mainly centered on oil, which should be favorable in the light of weak gas prices.

We remain somewhat 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.

The Zacks Consensus Estimate for the to-be reported quarter is 12 cents per share, indicating a 331% year-over-year decline. The Zacks Consensus Estimates for 2012 and 2013 are currently pegged at 39 cents and 34 cents per share, respectively. This reflects year-over-year decreases of 55.7% and 12.8% for 2012 and 2013, respectively.

Forest Oil holds a Zacks Rank #3, equivalent to a Hold rating for a period of 1 to 3 months. Stocks within the oil and gas sector worth considering are Cabot Oil & Gas Corp ( COG - Analyst Report ) and Memorial Production Partners L.P. ( MEMP - Snapshot Report ) . Both have attractive prospects and carry a Zacks Rank #1 (Strong Buy).