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TheStreet Open House

Forest Oil Announces Second Quarter 2012 Results

Stocks in this article: FST

Since Forest's last earnings release, four horizontal Cotton Valley wells (100% working interest) in East Texas were completed with an average 24-hour maximum production rate of 8.7 MMcfe/d, including 580 Bbls/d of oil and natural gas liquids or 40% of total equivalent production.

By the fourth quarter of 2012, Forest plans to reduce its operated rigs from two to one targeting the Cotton Valley liquids interval.

NATURAL GAS, NATURAL GAS LIQUIDS, AND OIL DERIVATIVES

As of July 30, 2012, Forest had natural gas, natural gas liquids, and oil derivatives in place for 2012 and 2013 covering the aggregate average daily volumes and weighted average prices shown below. Since the last earnings release, Forest added an additional 25.8 Bbtu/d of Calendar 2013 natural gas swaps at $3.78 per MMBtu.

      Jul - Dec      
2012 2013
Natural gas swaps:
Contract volumes (Bbtu/d) 155.0 (1) 160.0
Weighted average price (per MMBtu) $ 4.63 $ 3.98
 
Natural gas liquids swaps:
Contract volumes (MBbls/d) 2.0 -
Weighted average price (per Bbl) $ 45.22 $ -
 
Oil swaps:
Contract volumes (MBbls/d) 4.5 -
Weighted average price (per Bbl) $ 97.26 $ -
 
(1)        

50 Bbtu/d of 2012 gas swaps (with a weighted average hedged price per MMBtu of $5.30) are layered with a written put of $3.53 and a call spread of $4.00-to-$4.50. Together with the put and call spread, Forest will receive the swap price of $5.30 on the 50 Bbtu/d except as follows: Forest will receive (i) NYMEX Henry Hub (HH) plus $1.77 when NYMEX HH is below $3.53; (ii) $5.30 plus the value of the call spread when NYMEX HH is between $4.00 and $4.50; and (iii) $5.80 when NYMEX HH is $4.50 or above.

 

 
In connection with entering into certain 2012 gas swaps with premium hedged prices, Forest granted oil puts to the counterparties, giving the counterparties the option to put 5 MBbls/d to Forest at $75.00 per Bbl on a monthly basis during the period July 2012 through December 2012.
 

In connection with several swaps shown in the table above, Forest granted swaption instruments to counterparties in exchange for Forest receiving premium hedged prices on the swaps. The table below sets forth the outstanding swaptions as of July 30, 2012:

      2013       2014
Natural gas swaptions:
Contract volumes (Bbtu/d) 40.0 -
Weighted average price (per MMBtu) $ 4.02 $ -
 
Oil swaptions:
Contract volumes (MBbls/d) 5.0 5.0
Weighted average price (per Bbl) $ 97.00 $ 105.80
 

NON-GAAP FINANCIAL MEASURES

Adjusted Net Earnings

In addition to reporting net earnings (loss) from continuing operations as defined under generally accepted accounting principles (GAAP), Forest also presents adjusted net earnings from continuing operations (adjusted net earnings), which is a non-GAAP performance measure. Adjusted net earnings consists of net earnings (loss) from continuing operations after adjustment for those items shown in the table below. Adjusted net earnings does not represent, and should not be considered an alternative to, GAAP measurements such as net earnings (loss) from continuing operations (its most comparable GAAP financial measure), and Forest's calculations thereof may not be comparable to similarly titled measures reported by other companies. By eliminating the items shown below, Forest believes that the measure is useful to investors because similar measures are frequently used by securities analysts, investors, and other interested parties in their evaluation of companies in the oil and gas industry. Forest's management does not view adjusted net earnings in isolation and also uses other measurements, such as net earnings (loss) from continuing operations and revenues to measure operating performance. The following table provides a reconciliation of net earnings (loss) from continuing operations, the most directly comparable GAAP measure, to adjusted net earnings for the periods presented (in thousands):

       

Three Months EndedJune 30,

2012       2011
 
Net earnings (loss) from continuing operations $ (511,173 ) $ 29,104
 

Ceiling test write-down of oil and natural gasproperties, net of tax

222,612 -

Change in valuation allowance on deferred taxassets

289,898 -
 

Severance and stock-based compensationacceleration, net of tax

3,829 -
Non-deductible stock-based compensation costs 1,702 -
 
Unrealized gains on derivative instruments, net of tax (61 ) (22,860 )
Legal proceeding costs, net of tax - 4,149
Canadian dividend tax, net of tax   -     18,460  
Adjusted net earnings $ 6,807   $ 28,853  
 
Earnings attributable to participating securities   (166 )   (537 )
Adjusted net earnings for diluted earnings per share $ 6,641   $ 28,316  
 

Weighted average number of diluted sharesoutstanding

  115,109     112,176  
 
Adjusted diluted earnings per diluted share $ 0.06   $ 0.25  
 

Adjusted EBITDA

In addition to reporting net earnings (loss) from continuing operations as defined under GAAP, Forest also presents adjusted net earnings before interest, income taxes, depreciation, depletion, and amortization from continuing operations (adjusted EBITDA), which is a non-GAAP performance measure. Adjusted EBITDA consists of net earnings (loss) from continuing operations after adjustment for those items shown in the table below. Adjusted EBITDA does not represent, and should not be considered an alternative to, GAAP measurements such as net earnings (loss) from continuing operations (its most comparable GAAP financial measure), and Forest's calculations thereof may not be comparable to similarly titled measures reported by other companies. By eliminating the items shown below, Forest believes the measure is useful in evaluating its fundamental core operating performance. Forest also believes that adjusted EBITDA is useful to investors because similar measures are frequently used by securities analysts, investors, and other interested parties in their evaluation of companies in the oil and gas industry. Forest's management uses adjusted EBITDA to manage its business, including in preparing its annual operating budget and financial projections. Forest's management does not view adjusted EBITDA in isolation and also uses other measurements, such as net earnings (loss) from continuing operations and revenues to measure operating performance. The following table provides a reconciliation of net earnings (loss) from continuing operations, the most directly comparable GAAP measure, to adjusted EBITDA for the periods presented (in thousands):

       

Three Months EndedJune 30,

2012       2011
 
Net earnings (loss) from continuing operations $ (511,173 ) $ 29,104
 
Income tax expense 167,074 46,757
Interest expense 34,317 37,819

Ceiling test write-down of oil and natural gasproperties

348,976 -
Depreciation, depletion, and amortization 72,987 52,360
Unrealized gains on derivative instruments, net (111 ) (35,774 )
Stock-based compensation 6,240 3,604
Accretion of asset retirement obligations 1,597 1,508
Legal proceeding/severance costs   1,851     6,500  
 
Adjusted EBITDA $ 121,758   $ 141,878  
 

Adjusted Discretionary Cash Flow

In addition to reporting net cash provided by operating activities of continuing operations as defined under GAAP, Forest also presents adjusted discretionary cash flow of continuing operations (adjusted discretionary cash flow), which is a non-GAAP liquidity measure. Adjusted discretionary cash flow consists of net cash provided by operating activities of continuing operations after adjustment for those items shown in the table below. This measure does not represent, and should not be considered an alternative to, GAAP measurements such as net cash provided by operating activities of continuing operations (its most comparable GAAP financial measure), and Forest's calculations thereof may not be comparable to similarly titled measures reported by other companies. Forest's management uses adjusted discretionary cash flow as a measure of liquidity and believes it provides useful information to investors because it assesses cash flow from operations before changes in operating assets and liabilities, which fluctuate due to the timing of collections of receivables and the settlements of liabilities, and other items. Forest's management uses adjusted discretionary cash flow to manage its business, including in preparing its annual operating budget and financial projections. This measure does not represent the residual cash flow available for discretionary expenditures. Forest’s management does not view adjusted discretionary cash flow in isolation and also uses other measurements, such as net cash provided by operating activities of continuing operations to measure operating performance. The following table provides a reconciliation of net cash provided by operating activities of continuing operations, the most directly comparable GAAP measure, to adjusted discretionary cash flow for the periods presented (in thousands):

       

Three Months EndedJune 30,

2012       2011
 

Net cash provided by operating activities ofcontinuing operations

$ 82,865 $ 73,951
 
Changes in operating assets and liabilities:
Accounts receivable (12,722 ) (12,633 )
Other current assets (2,729 ) (10,607 )
Accounts payable and accrued liabilities 9,063 5,478
Accrued interest and other current liabilities 11,068 14,128
Canadian dividend tax (1) - 28,921
Legal proceeding/severance costs (1)   1,851     6,500  
 
Adjusted discretionary cash flow $ 89,396   $ 105,738  
 

(1)

     

The Canadian dividend tax, legal proceeding costs, and severance costs are non-recurring cash-settled items. Including the effect of these items, adjusted discretionary cash flow for the three months ended June 30, 2012 and June 30, 2011 would have been $88 million and $70 million, respectively.

 

Net Debt

In addition to reporting total debt as defined under GAAP, Forest also presents net debt, which is a non-GAAP debt measure. Net debt consists of the principal amount of debt adjusted for cash and cash equivalents at the end of the period. Forest's management uses net debt to assess Forest's indebtedness. The following table sets forth the components of net debt (in thousands):

        June 30, 2012       March 31, 2012
Principal         Book (1) Principal       Book (1)
Credit facility $ 348,000 $ 348,000 $ 215,000 $ 215,000
7% Senior subordinated notes due 2013 12 12 12 12
8 1/2% Senior notes due 2014 600,000 590,513 600,000 589,062
7 1/4% Senior notes due 2019   1,000,000   1,000,393   1,000,000   1,000,407
Total debt 1,948,012 1,938,918 1,815,012 1,804,481
 
Less: cash and cash equivalents   680   680   877   877
 
Net debt $ 1,947,332 $ 1,938,238 $ 1,814,135 $ 1,803,604
 
(1)      

Book amounts include the principal amount of debt adjusted for unamortized net discounts on the issuance of certain senior notes of $(9) million and $(11) million at June 30, 2012 and March 31, 2012, respectively.

 

TELECONFERENCE CALL

A conference call is scheduled for Tuesday, July 31, 2012, at 12:00 PM MT to discuss the release. You may access the call by dialing toll free 800.706.7745 (for U.S./Canada) and 617.614.3472 (for International) and request the Forest Oil teleconference (ID # 59802625). The conference call will also be webcast live on the Internet and can be accessed by going to the Forest Oil website at www.forestoil.com in the “Investor Relations” section of the website. A Q&A period will follow.

A replay of the conference call will be available through August 14, 2012. You may access the replay by dialing toll free 888.286.8010 (for U.S./Canada) and 617.801.6888 (for International), conference ID # 72934546. An archive of the conference call webcast will also be available at www.forestoil.com in the “Investor Relations” section of the website.

FORWARD-LOOKING STATEMENTS

This news release includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements, other than statements of historical facts, that address activities that Forest assumes, plans, expects, believes, projects, estimates or anticipates (and other similar expressions) will, should or may occur in the future are forward-looking statements. The forward-looking statements provided in this press release are based on management's current belief, based on currently available information, as to the outcome and timing of future events. Forest cautions that future natural gas and liquids production, revenues, cash flows, liquidity, plans for future operations, expenses, outlook for oil and natural gas prices, timing of capital expenditures, and other forward-looking statements relating to Forest are subject to all of the risks and uncertainties normally incident to their exploration for and development and production and sale of liquids and natural gas.

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