Should You Buy It? Forest Oil

Forest Oil (FST Quote) has rocketed more than 51% year to date, closing Wednesday at $76.41. Even so, the stock trades at just 13.5 times expected 2008 earnings of $5.71. This is in line with the average valuation of the S&P 500 index, and an 8% discount to the company's peers.

With that in mind, should you buy it? Does Forest Oil still hold value at current levels, or would potential investors be chasing the stock up here?

Back on June 30, the company disclosed that it had 90,000 net acres of leasehold land in the Haynesville Shale (Texas/Louisiana), with a resource potential of 5 trillion cubic feet (Tcfe) of natural gas equivalent. Forest ended 2007 with proven reserves of just 2 trillion Tcfe of natural gas.

Forest Oil Still on Fire

Production is not expected to ramp at the company's Haynesville site until 2009. In the meantime, Forest will drill 10 to 15 new vertical pilot wells in the second half of the year.

The company also plans to drill four horizontal test wells at the Utica shale in Quebec, beginning this month. As a result, Forest Oil is taking advantage of rising natural gas prices and targeting to spend $1.15 billion to $1.25 billion on exploration and drilling in 2008 and generate 15% annual organic production growth over the next couple of years.

On the other hand, Forest's balance sheet does raise some red flags. The company's total debt stands at 75% of common equity, rising to $1.8 billion at the end of the March quarter, compared with $1.25 billion the year before.

Even so, it is targeting cash flow in excess of its capital expenses over the next several quarters, which management plans to use toward acquisitions.

With that in mind, yes, I would buy Forest Oil -- but on a pullback in the stock price. The shares, along with the rest of the natural gas sector, have just run too far too fast. And despite the company's debt-laden balance sheet, at or below $70 a share, I believe the stock offers readers an attractive risk/reward potential.