The Deal: Forest Oil Gets Serious About Debt Reduction

NEW YORK ( The Deal) -- Denver oil and gas explorer Forest Oil Corp. ( FST) said Monday it plans to sell all of its properties in the Texas Panhandle, which would go a long way toward paying down its onerous debt load.

The company said it hired JP Morgan Securities LLC to advise it after receiving unsolicited proposals from potential buyers. It hopes to close the sale by the end of the year and use any proceeds to cut debt and enhance financial flexibility.

JP Morgan's Laurence Whittemore is leading the sale effort, a source said.

Simmons & Co. International wrote in a report Monday that the 100,000 acres could fetch $1.356 billion on a proved reserves basis or $758 million on a production basis, or an average of $1.06 billion. Robert W. Baird & Co. expects the company to bring in $900 million to $1 billion, while Zeits Energy Analytics thinks more than $1.5 billion would be required to justify Forest's stock price, which may be difficult in today's highly competitive divestiture market.

Forest CEO Patrick McDonald said in a statement that drilling and completion efforts by Forest and other companies over the last several years have found substantial oil, natural gas and natural gas liquids resources in the Texas Panhandle.

"Our significant acreage position, which is largely operated by Forest and held by production, presents a large-scale, low-risk development opportunity," he said. "If completed, the sale of the Texas Panhandle assets should allow us to reduce meaningfully our indebtedness and enhance our financial flexibility and ability to accelerate development of our assets."

McDonald said Forest's remaining assets would be anchored by its oil development opportunity in the Eagle Ford Shale, where oil production is projected to more than double next year. The company also has 111,000 net acres in East Texas that is largely held by production, which Forest plans to continue to develop, and it intends to keep potential natural gas development through its low-decline natural gas properties in the Arkansas-Louisiana-Texas region, McDonald said.

Simmons bases its $1.06 billion sale estimate on the last transaction in the Granite Wash, Laredo Petroleum Holdings Inc.'s ( LPI) $438 million sale to EnerVest Ltd. in May, which worked out to $2.56 per thousand cubic feet equivalent for the proved reserves and $7,584 per thousand cubic feet equivalent per day of production. However, it notes that Laredo's properties were 95% natural gas versus 50% for Forest's (the rest is 20% oil and 30% natural gas liquids).

Forest's stock is down 30% this year on concerns about its debt load. Moody's Investors Service downgraded its credit rating in May citing the company's financial weakness and less production and reserves after divestitures to pay down more debt.

In the first quarter, Forest had a debt-to-capitalization ratio of 107%, up from 102% at the end of the fourth quarter.

Simmons said the transaction would enable Forest to deliver the company in one fell swoop, "thereby taking worries of breaking debt covenants off the table," and would likely be accretive to net asset value.

However, investors could perceive Forest to be selling its best asset and lead them to wonder how its remaining assets -- in the Eagle Ford, East Texas and the Permian -- will drive production growth and cash flows/returns going forward, Simmons said. Last week's announcement by SM Energy Co. ( SM) that it also is selling its assets in the area might make for a crowded selling environment, the firm added.

Simmons estimates the assets have 530 billion cubic feet equivalent of proved reserve, 49% of its proved reserves last year, and 100 million cubic feet equivalent per day of production, 48% of its estimated second-quarter production.

Forest said in May it was open to fielding inquiries about the properties from potential partners. Earlier in the year the company also was thought to have its Permian assets on the block.

In April, Forest sold half of its Eagle Ford assets to Schlumberger Ltd. ( SLM) to help develop them. In January it sold its non-Eagle Ford assets to Hilcorp Energy Corp. for $325 million and last year divested properties in Louisiana and South Africa for $330 million.

Written by Claire Poole