Forest Oil announced its 2011 capital budget and related guidance. As a result of positive operational momentum and economic organic growth achieved in 2010, the Company intends to focus 75% of its drilling activity in its liquids-rich Granite Wash assets in the Texas Panhandle and its royalty-incentivized Deep Basin gas assets and Peace River Arch light-oil assets in Canada. Additionally, Forest expects to commence a first-half of 2011 weighted development program of its Eagle Ford oil asset, with an initial investment of $50 million of capital allocated to the play. These areas have significant horizontal project inventories on large undeveloped land bases that have the ability to carry future development for an extended period of time. In total, approximately 80% of the 2011 capital budget will be allocated to liquids-rich prospects, with the remainder allocated primarily to gas development in the Deep Basin of Alberta, Canada, that has favorable economic attributes through substantial provincial royalty incentives. 2011 guidance highlights are as follows:
H. Craig Clark, President and CEO stated, "Our portfolio of assets provides us with the ability to organically grow production by double-digits while spending near cash flow. The focus in 2011 will be in the Granite Wash in the Texas Panhandle, the Deep Basin and Peace River Arch assets in Canada, and our Eagle Ford oil asset in South Texas. In total, we expect to spend 80% of our exploration and development budget in 2011 on liquids-rich prospects. The Granite Wash is expected to receive about half of our budget in 2011 with development efforts focused in both our southern and central fairways through the utilization of six horizontal rigs. Our methodical development efforts in the Granite Wash continue to expand the play both geographically and geologically, expanding our opportunity set in the Texas Panhandle. We will allocate about one-third of our budget to Canada, focusing on the Deep Basin in our Nikanassin resource play and in the Peace River Arch in our Evi light oil play. As we have in virtually all of our development plays, we intend to transition the Nikanassin resource play to horizontal development in 2011 and expand the scope of horizontal drilling in our Evi field. We also initially intend to deploy a one to two rig drilling program in our Eagle Ford oil window acreage in Gonzales and Wilson Counties focused on the first-half of 2011. Our 2011 production guidance reflects mid-case type curves with no material production contribution from the Eagle Ford. In summary, we expect to focus our drilling on liquids to enhance returns while generating organic double-digit production growth and spending near cash flow."
The focus of Forest's drilling program in 2011 will primarily involve horizontal drilling in areas that have significant growth opportunities through large project inventories. Forest entered 2011 operating six drilling rigs, after ramping down activity at the end of 2010 to reposition its rig fleet, and intends to expand the fleet to 13 to 14 rigs by the end of the first quarter.
Prices for Forest's products are determined primarily by prevailing market conditions. Market conditions for these products are influenced by regional and worldwide economic and political conditions, consumer product demand, weather, and other substantially variable factors. The cost of services and materials needed to produce Forest's products are also determined by prevailing market conditions, both regional and worldwide. These factors are beyond Forest's control and are difficult to predict. In addition, prices received by Forest for its liquids and gas production may vary considerably due to differences between regional markets, transportation availability, and demand for different grades of products. Forest's financial results and resources are highly influenced by this price volatility.
Estimates for Forest's future production are based on assumptions of capital expenditure levels and the assumption that market demand, prices for liquids and gas, and the cost of required services and materials will continue at levels that allow for economic production of these products.
The production, transportation, and marketing of liquids and gas are complex processes that are subject to disruption due to transportation and processing availability, mechanical failure, human error, and meteorological events (including, but not limited to severe weather, hurricanes, and earthquakes). Forest's estimates are based on certain other assumptions, such as well performance, which may vary significantly from those assumed. Therefore, Forest can give no assurance that its future results will be as estimated.
The guidance below represents Forest's guidance for 2011 without consideration of the proposed initial public offering (IPO) and spin-off of Forest's Canadian operations through Forest's wholly-owned subsidiary, Lone Pine Resources Inc. (Lone Pine).The Company intends to revise its guidance on or about the time of Lone Pine's IPO.
For the year ended December 31, 2011, Forest intends to invest between $600 million and $650 million for capital activities (excluding capitalized interest, capitalized stock-based compensation, asset retirement obligations incurred, and asset and leasehold acquisitions).
Oil and Gas Net Sales Volumes: Forest expects average annual net sales volumes of 490 MMcfe/d in 2011. Annual 2011 organic production growth is expected to be approximately 10%, pro forma for the average net sales volume impact of divestitures of 7 MMcfe/d in 2010. Sequential quarter-over-quarter organic growth is expected to commence in the second quarter of 2011 as Forest's rig count increases throughout the first quarter. Net sales volumes are expected to be comprised of approximately 70% natural gas and 30% liquids (13% crude and condensate and 17% natural gas liquids).
Based on current prices, Forest expects natural gas price realizations in 2011 will average $0.40 to $0.60 per MMBtu less than the NYMEX Henry Hub price, not including the effect of derivatives.
Based on current prices, Forest expects oil price realizations in 2011 will average $6.00 to $8.00 per Bbl less than the NYMEX West Texas Intermediate (WTI) price, not including the effect of derivatives.
Based on current prices, Forest expects natural gas liquids realizations in 2011 will average 37.5% to 42.5% of the WTI price, not including the effect of derivatives.
Total Cash Costs: Forest expects total cash costs (which include production expense, general and administrative expense [excluding stock-based compensation], interest expense and current income tax expense) will be $385 million to $420 million, or $2.15 to $2.35 per Mcfe. The following is a detail of the guidance for total cash costs in 2011:
Production Expense: Forest expects production expense (which includes lease operating expense, ad valorem taxes, production taxes, and product processing, gathering and transportation) will be $200 million to $220 million, or $1.15 to $1.25 per Mcfe.
General and Administrative (G&A) Expense: Forest expects G&A expense will be $50 million to $55 million, not including stock compensation expense, or $0.25 to $0.30 per Mcfe.
Interest Expense: Forest expects interest expense will be $135 million to $145 million, or $0.75 to $0.80 per Mcfe.
Income Tax Expense: Forest's total effective income tax rate is expected to be 36% (inclusive of applicable federal and state taxes), and Forest's current tax is expected to be 1% to 2% of the total income tax expense.
Stock Compensation Expense: Forest expects non-cash stock compensation expense will be $22 million to $25 million.
Depreciation, Depletion, and Amortization (DD&A) Expense: Forest expects its DD&A rate will be $1.75 to $1.85 per Mcfe.
NATURAL GAS, NATURAL GAS LIQUIDS, AND OIL DERIVATIVES
As of January 20, 2011, Forest had natural gas, natural gas liquids, and oil derivatives in place for 2011 and 2012 covering the aggregate average daily volumes and weighted average prices shown below. None of these derivatives contain knock-out provisions that would cause a derivative to cease to exist at prices below an established threshold. The derivative counterparties consist of commercial banks that are lenders under Forest's credit facilities, or affiliates of such banks.
Forest does not have any basis derivatives in place as of January 20, 2011.
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