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Why Forest Oil (FST) Stock Is Soaring On Tuesday

NEW YORK (TheStreet) -- Shares of Forest Oil Corporation (FST) are skyrocketing 27.37% to $2.28 on Tuesday after the company announced a merger with Sabine Oil & Gas LLC.

Under the terms of the agreement, Sabine and Forest will combine their businesses in an all-stock transaction.

Sabine Oil & Gas is a privately held natural gas and oil company. 

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Once the merger is complete, Sabine unit holders will own 73.5% of the newly combined company, Forest shareholders will own 26.5%.

The Sabine Oil & Gas Corporation, as the company will be called following the merger, is expected to list on the New York Stock Exchange under the ticker SABO.

TheStreet Ratings team rates FOREST OIL CORP as a Sell with a ratings score of D. TheStreet Ratings Team has this to say about their recommendation:

"We rate FOREST OIL CORP (FST) a SELL. This is driven by a number of negative factors, which we believe should have a greater impact than any strengths, and could make it more difficult for investors to achieve positive results compared to most of the stocks we cover. The company's weaknesses can be seen in multiple areas, such as its generally high debt management risk, weak operating cash flow and generally disappointing historical performance in the stock itself."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The debt-to-equity ratio is very high at 14.69 and currently higher than the industry average, implying increased risk associated with the management of debt levels within the company. To add to this, FST has a quick ratio of 0.61, this demonstrates the lack of ability of the company to cover short-term liquidity needs.
  • Net operating cash flow has significantly decreased to $17.77 million or 79.29% when compared to the same quarter last year. In addition, when comparing to the industry average, the firm's growth rate is much lower.
  • FST's stock share price has done very poorly compared to where it was a year ago: Despite any rallies, the net result is that it is down by 56.32%, which is also worse that the performance of the S&P 500 Index. Investors have so far failed to pay much attention to the earnings improvements the company has managed to achieve over the last quarter. Naturally, the overall market trend is bound to be a significant factor. However, in one sense, the stock's sharp decline last year is a positive for future investors, making it cheaper (in proportion to its earnings over the past year) than most other stocks in its industry. But due to other concerns, we feel the stock is still not a good buy right now.
  • FOREST OIL CORP reported significant earnings per share improvement in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past year. However, we anticipate underperformance relative to this pattern in the coming year. During the past fiscal year, FOREST OIL CORP turned its bottom line around by earning $0.61 versus -$11.18 in the prior year. For the next year, the market is expecting a contraction of 95.9% in earnings ($0.03 versus $0.61).
  • The gross profit margin for FOREST OIL CORP is currently extremely low, coming in at 9.17%. Despite the low profit margin, it has increased significantly from the same period last year. Despite the mixed results of the gross profit margin, FST's net profit margin of 120.04% significantly outperformed against the industry.
  • You can view the full analysis from the report here: FST Ratings Report
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