Forest Oil Q1 2010 Earnings Call Transcript

Forest Oil Q1 2010 Earnings Call Transcript
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Forest Oil (FST)

Q1 2010 Earnings Call

May 04, 2010 2:00 pm ET

Executives

H. Clark - Chief Executive Officer, President, Director and Member of Executive Committee

John Ridens - Chief Operating Officer and Executive Vice President

Michael Kennedy - Chief Financial Officer and Executive Vice President

Patrick Redmond - Vice President of Corporate Planning and Investor Relations

Analysts

Biju Perincheril - Jefferies & Company, Inc.

Jeffrey Robertson - Barclays Capital

Brian Kuzma - JP Morgan

Dan McSpirit - BMO Capital Markets U.S.

John Fitzgerald - Raymond James

Gil Yang - BofA Merrill Lynch

David Tameron - Wells Fargo Securities, LLC

Anuj Sharma

David Kistler - Simmons & Company

Scott Hanold - RBC Capital Markets Corporation

Brian Singer - Goldman Sachs Group Inc.

Presentation

Operator

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Good afternoon, ladies and gentlemen. My name is Sarah, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Quarter 2010 Earnings Conference Call. [Operator Instructions] Thank you. Mr. Redmond, you may begin your conference.

Patrick Redmond

Thank you, and good afternoon. I want to thank you for participating in our First Quarter 2010 Earnings Conference Call. I will note that a replay of this conference call will be available through May 18, as described in our press release issued yesterday. We have joining us today, Craig Clark, President and CEO; Michael Kennedy, Executive Vice President and CFO; and J.C. Ridens, Executive Vice President and COO.

Some of the presenters today will reference certain non-GAAP financial measures, regularly used by Forest in measuring its financial performance. Reconciliation of such non-GAAP financial measures with the most comparable financial measure calculated in accordance with GAAP are available on our website and can be viewed by clicking on the Investor Relations tab, then non-GAAP at www.forestoil.com.

In addition, I'd like to caution you about our forward-looking statements. All statements other than statements of historical facts that address activities and outcomes that Forest expects, assumes, plans, believes, budgets, forecasts, projects, estimates, anticipates, et cetera, about what will, should or may occur in the future are forward-looking statements. Please carefully review our cautionary language regarding forward-looking statements that is contained at the end of our press release.

I will now turn the call over to Michael Kennedy. Thank you.

Michael Kennedy

Thanks, Pat, and thanks, everyone for joining us on a busy earnings day. The first quarter of 2010 marked Forest Oil's return to organic growth as production pro forma for divestitures was up 1% sequentially to $417 million per day. This was achieved despite selling $3 million a day of non-core properties in Canada during the quarter. Production exceeded our guidance of $412 million a day and has positive momentum due to our excellent results in the Texas Panhandle. These results have also led us to update our guidance to reflect an increase of liquids component of our production mix up to 22.5%.

Realizations also were positive as natural gas came in at $0.43 per Mcfe differential. Oil came in at a $4.63 per barrel differential, and we realized 51% of WTI for our NGLs. Due to our favorable marketing contracts, we have increased the guidance for our NGL pricing to 42.5% of WTI.

Production expense for the quarter came in below the midpoint of guidance at $1.21 per Mcfe. This line item continues to impress as our cost-cutting initiatives have us firmly entrenched as a low cost producer. Cash, G&A expense for the quarter decreased sequentially, $0.06 per Mcfe to $0.36 per Mcfe. We have increased our guidance by $5 million related to G&A expense, taking into account our comp expense related to our increased activity. But we remain in the low end of our peer group at approximately $0.31 per Mcfe for the year.

DD&A expense came in higher than our guided range at $1.39 per Mcfe, as increased service cost pressured our future development costs, and the strengthened Canadian dollar resulted in an increase in our Canadian business unit cost. We have increased our DD&A guidance to incorporate these two items.

Our E&D capital expenditures of $216 million was, as expected, disproportionately weighted towards the first quarter as our activity in Canada has performed in the winter months before the spring breakup. We are running up to seven rigs during the quarter in Canada. Whereas currently, we're not running any rigs during breakup.

We also invested $63 million in acreage, adding acreage in all the three core areas and adding to our significant Eagle Ford Shale position. Our balance sheet remained strong during the quarter. Forest's borrowing base was reaffirmed in April of 2010 at $1.3 billion, and we have over $200 million in cash, which results in liquidity in excess of $1.5 billion.

Net debt increased by approximately $100 million during the quarter as the accelerated CapEx in Canada, the acreage acquisitions and the cash tax payment of $63 million related to the gain on our 2009 Permian sale exceeded our discretionary cash flow.

In order to adhere to our strategy of maintaining a strong balance sheet, Forest announced at our analyst conference in March of 2010, divestiture program of $150 million, and we are making progress towards that goal. We have started the process of selling our East Texas midstream assets and have sold an additional $17 million Canadian properties in April of 2010. The divestiture program should bridge any gap between our capital program and discretionary cash flow in 2010.

In summary, the first quarter of 2010 marked the return of organic growth with significant momentum generated toward meeting our double-digit organic growth guidance. This should be achieved without adding any leverage to the balance sheet and maintaining our excellent liquidity position. In my mind, this qualifies as a successful and sustainable business plan.

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