Forest Oil Management Discusses Q2 2012 Results - Earnings Call Transcript

Forest Oil (FST)

Q2 2012 Earnings Call

July 31, 2012 2:00 pm ET

Executives

Larry C. Busnardo - Director of Investor Relations

Michael N. Kennedy - Chief Financial Officer and Executive Vice President

Patrick R. McDonald - Interim Chief Executive Officer, Director and Member of Executive Committee

Analysts

Brian Singer - Goldman Sachs Group Inc., Research Division

Brian Lively - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Pearce W. Hammond - Simmons & Company International, Research Division

Michael A. Hall - Robert W. Baird & Co. Incorporated, Research Division

Duane Grubert - Susquehanna Financial Group, LLLP, Research Division

Biju Z. Perincheril - Jefferies & Company, Inc., Research Division

Dan McSpirit - BMO Capital Markets U.S.

Bradford Alan Evans - Heartland Advisors, Inc.

Gregg Brody - JP Morgan Chase & Co, Research Division

Peter Brotchie

Scott Hanold - RBC Capital Markets, LLC, Research Division

Brian T. Velie - Capital One Southcoast, Inc., Research Division

Joseph Patrick Magner - Macquarie Research

David R. Tameron - Wells Fargo Securities, LLC, Research Division

Cody Campbell

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2012 Forest Oil Corporation Earnings Conference Call. My name is Shaquana, and I will be your coordinator for today. [Operator Instructions] I would now like to turn the presentation over to your host for today's call, Mr. Larry Busnardo, Director of Investor Relations. Please proceed, sir.

Larry C. Busnardo

Good afternoon. I want to thank you for participating in our second quarter 2012 earnings conference call. A replay of this call will be available through August 14 as described in our press release issued yesterday. Joining us on the call today is Patrick McDonnell, Forest's Interim CEO; and Michael Kennedy, Executive Vice President and CFO.

Some of the presenters today will reference certain non-GAAP financial measures regularly used by Forest in measuring its financial performance. Reconciliations of such non-GAAP financial measures with the most comparable financial measure calculated in accordance with GAAP will be available on our website and viewed by clicking on the Investor Relations tab, then non-GAAP at 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 as its contained at the end of our press release.

And with that, I'll turn the call over to Michael Kennedy.

Michael N. Kennedy

Thanks, Larry, and thanks to everyone joining us today. I'll keep my comments relatively brief and touch on a couple of the highlights for the quarter, as the press release issued yesterday afternoon covers the quarter in detail. Second quarter 2012 equivalent production came in at 335 million per day. This is unchanged on a year-over-year basis. Our focus on oil projects continues to pay dividends, as second quarter oil volumes increased 27% over the same period last year. This effort trend will continue as Forest Oil 4 of our 5 rigs targeting oil projects by the fourth quarter.

Third-party infrastructure issues in the Panhandle persisted in the second quarter, which negatively impacted production by approximately 8 million per day due to downtime associated with the third-party NGL facility. The plant was return to operations on July 3. Unplanned downtime is frustrating and we continue to incorporate additional gas gatherers for our Panhandle production. This will provide us with flexibility and optionality, and should help to minimize these unplanned curtailments going forward. We should begin to see these benefits beginning later this year.

We, along with the industry, continues to feel the effects of lower natural gas prices this year. Due to this, Forest recorded a ceiling test write-down of $345 million in the second quarter. The write-down was primarily a result of the significant decline in the 12 months trailing natural gas price used in the ceiling test calculation from $3.73 per Mcfe last quarter to $3.15 per Mcfe this quarter. Given the current pricing environment, we expect the ceiling test write-down in the third quarter as well. We also recorded a deferred tax asset valuation allowance of $290 million due primarily to the ceiling test write-down.

As the natural gas environment has remained depressed, our hedge position continues to work in our favor, as we realized a 73% uplift to our unhedged realized price. This translated into $28 million realized gain on our second quarter gas hedges.

We have selectively added to our natural gas hedge position for 2013 by adding 26 million per day of swaps of $3.78. We now have 155 million per day of swaps for the second half of 2012 period at $4.63 and 160 million per day for 2013 at $3.98. A full summary of our hedge position can be found on Page 6 of the press release or in the 10-Q to be filed later.

We have taken the initial steps in improving the company's financial strength and flexibility. The first step was reducing second half capital expenditures to a range of $190 million to $210 million, or about cash flow. This leaves down significantly from the first half front rate and will allow us to align spending more closely with expected cash flow levels by the start of the fourth quarter. Secondly, we will first look to monetize non-reserve-based and noncore assets. These are primarily assets outside our core Panhandle, Eagle Ford and East Texas areas. We hope to have a couple hundred million of asset sales over the next several quarters completed and we'll continue the effort throughout 2013. The process is underway and we will update you once we have something to report.

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