Forest Oil Corporation announced a definitive agreement with an undisclosed buyer to sell a portion of its largely undeveloped acreage position in the Permian Basin of West Texas. The proceeds of the transaction are estimated at $35 million.
The sale includes approximately 58,200 gross acres (52,350 net) located in Crockett County, Texas. It is expected to close on or before Sep 10, 2013.
Forest intends to use the proceeds from the sale to reduce debt and enhance financial flexibility. Following closure, Forest will retain its Permian Basin acreage position of approximately 68,250 gross acres (63,500 net) located in Pecos and Reeves Counties, Texas.
We like the initiatives undertaken by Forest Oil to increase its liquids production. The company’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. Forest Oil has a significant upstream presence in the emerging basins of Texas, Canada and Mexico.
In its attempt to expand liquids production, Forest Oil has already added considerable acreage in the Permian Basin, getting access to potential oil resources in several oil-bearing pay zones, including the Wolfbone and Wolfcamp Shale plays. Production for the year is expected to average 220–230 million cubic feet equivalent per day (MMcfe/d). The forecast is mainly centered on oil, which should be favorable in light of weak gas prices with liquids comprising 40% of the total production.
Forest Oil has a growing upstream presence in the emerging basins of Texas, Canada and Mexico. Production growth from the Eagle Ford Shale is a key component of the company’s overall annual upstream growth plans over the next few years.
However, on the flip side, the company has a highly gas-weighted reserves/production profile and exposure to the inherently cyclical and volatile exploration and production sector. This is not aided by its highly levered balance sheet. Long-term debt (including current portion) stood at $1,630.3 million.
The company is consequently intent on divesting its non-core properties to boost financial strength and flexibility. We believe this will eventually allow the company to aggressively pursue growth opportunities in its plays and provide meaningful upside potential for investors.
Forest Oil holds a Zacks Rank #3 (Hold). However, there are other stocks in the oil and gas sector like Carrizo Oil & Gas Inc. (CRZO - Free Report) , Whiting USA Trust I and Oiltanking Partners, L.P. which hold a Zacks Rank #1 (Strong Buy) and are expected to perform better in the near term.