H. Craig Clark, President and CEO, stated, "I'm very pleased about the progress made in 2004 and in particular the improvement in the quality of the properties in our portfolio. The 2003 and 2004 acquisition programs and the 2004 disposition program have streamlined the company's asset base and have allowed us to focus on the generation of drilling opportunities within our remaining property base. We estimate that at the end of 2004, we had an inventory of approximately 1,100 development opportunities and 1,075 exploration opportunities. This represents a significant increase in not only the number of projects, but the quality of our project inventory from a year ago. With detailed field reviews of remaining legacy fields continuing, our inventory of low risk, profitable drilling opportunities should increase. By focusing on exploitation activities associated with our existing reserve base, we were able to reduce our PUD percentage to 23%.
Financially, we also did exactly as we set out to do. We reduced the net debt to under $800 million and were able to reduce our leverage to 35%. The debt goals were achieved while replacing 176% of our production, upgrading the asset base of the company, and increasing the inventory of development and exploration opportunities. The execution of the Four-Point Strategy in 2004 was a clear success, and I look forward to continued execution in 2005."
FOURTH QUARTER 2004 RESULTS
For the fourth quarter of 2004, Forest's sales volumes averaged 502 MMcfe/d, an increase of 14% compared to the fourth quarter of 2003. The Company's EBITDA increased to a record $194 million in the fourth quarter of 2004, up 58% compared to the fourth quarter of 2003, due to increased production and higher per unit netbacks.
Forest reported net earnings from continuing operations for the quarter ended December 31, 2004 of $44 million or $0.73 per basic share, a 613% increase compared to net earnings from continuing operations of approximately $6 million or $.11 per basic share in the corresponding 2003 period. Net earnings in the fourth quarter of 2004 were adversely affected by an impairment of $2.4 million relating to international operations, a $2.2 million charge to write-off our interest in a non-operated oil pipeline destroyed by Hurricane Ivan, a charge of $5.1 million to establish a reserve for insurance surcharges related primarily to Hurricane Ivan and $1.6 million of merger expenses related to The Wiser Oil Company acquisition . Net earnings were favorably affected by a $4.7 million foreign exchange gain related to a Canadian investment liquidated in the fourth quarter. Excluding these items, Forest's net earnings from continuing operations were $48 million, or $.80 per basic share. Increased earnings for the fourth quarter of 2004 compared to 2003 were due primarily to increased EBITDA, offset partially by higher depletion expense.
During the fourth quarter of 2004, net cash flow from operations, exclusive of working capital items, was $178 million. Forest's fourth quarter 2004 capital expenditures for exploration and development were $81 million. Forest utilized a portion of its excess cash flow and proceeds from the sale of assets in the quarter to reduce net debt by $148 million to $797 million at December 31, 2004 from $945 million at September 30, 2004.
For the year ended December 31, 2004, Forest's sales volumes averaged 471 MMcfe/d, an increase of 15% compared to 2003. In addition, the Company's EBITDA increased to a record $637 million in 2004, up 39% compared to 2003, due to increased production, higher per unit netbacks and reduced G&A expense. General and administrative expense in 2004 was approximately $32 million, 11% less than in 2003 despite acquiring The Wiser Oil Company in June, 2004.
For the year ended December 31, 2004, Forest reported net earnings from continuing operations of $123 million or $2.16 per basic share, an increase of over 36% compared to net earnings from continuing operations of $90.2 million or $1.82 per basic share in 2003. Net earnings from continuing operations in 2004 were adversely affected in the year due to impairments of $4.1 million relating to international operations, a mark-to-market loss on acquired derivatives of $1.1 million, a $2.2 million charge to write off our interest in a non-operated oil pipeline destroyed by Hurricane Ivan, a charge of $5.1 million to establish a reserve for insurance surcharges related primarily to Hurricane Ivan and $1.6 million of merger expenses related to The Wiser Oil Company acquisition. Net earnings were favorably affected by a $4.7 million foreign exchange gain related to a Canadian investment liquidated in the fourth quarter. Excluding these items, the Company's earnings from continuing operations were $129 million, or $2.26 per basic share.
During 2004, net cash flow from operations, exclusive of working capital items, was a record $577 million. Forest's 2004 capital expenditures for exploration and development were $275 million. Forest utilized a portion of its excess cash flow and proceeds from the sale of assets to reduce net debt by $88 million to $797 million at December 31, 2004. In connection with The Wiser Oil Company acquisition in June, 2004, Forest had established a target to reduce net debt from $1 billion at June 30, 2004 to approximately $800 million by year-end. During 2004, the Company reduced its net debt to book capitalization ratio from 43% to 35%.
Reserves and Capital Activities
Forest reported year-end estimated proved reserves of 1,334 Bcfe, all of which are located in North America and 26% of which are located offshore in the Gulf of Mexico. The estimated proved reserves consist of approximately 60% natural gas and 40% oil. Estimated proved developed reserves account for approximately 77% of total estimated proved reserves. Forest does not currently have any reserves booked related to our international or Mackenzie Delta/Beaufort Sea discoveries.
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. These factors are beyond Forest's control and are difficult to predict. In addition, prices received by Forest for its oil and gas production may vary considerably due to differences between regional markets, transportation availability and demand for different grades of products. Consequently, 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 and prices for oil and gas 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, meteorological events including, but not limited to, hurricanes, earthquakes, and numerous other factors. Our estimates are based on certain other assumptions, such as well performance, which may vary significantly from those assumed. Therefore, we can give no assurance that our future production will be as estimated.
Although Forest has completed several major property acquisitions and dispositions in recent years, these transactions are opportunity driven. Thus, the following forward-looking data excludes the financial and operating effects of potential property acquisitions or divestitures during 2005. The timing and ultimate results of such acquisition and divestiture activity is difficult to predict, and may vary materially from current plans and expectations.
Given these general limitations and those discussed below, the following is a summary of Forest's forecast for 2005:
Daily Production. In the latter part of the fourth quarter of 2004, Forest divested of properties producing approximately 15 MMcfe/d. This resulted in a 2004 year-end production exit rate of approximately 490 MMcfe/d. We estimate that our daily production will be in the range of 475 to 505 MMcfe/d for the full year of 2005.
Liquids Production. We estimate that our 2005 production of oil and natural gas liquids will be between 29,000 and 31,000 Bbls/d.
Gas Production. We estimate that our 2005 natural gas production will be between 300 and 320 MMcf/d.
Production Expense. Our oil and gas production expense (which includes ad valorem taxes, production taxes and product gathering and transportation) varies in response to several factors. Among the most significant of these factors are additions to or deletions from our property base, changes in production taxes, general changes in the prices of services and materials that are used in the operation of our properties and the amount of repair and workover activity required. We expect that our 2005 production expense will be between $230 million and $250 million.
General and Administrative Expense (G&A). We estimate that our 2005 G&A expense will be between $34 million and $39 million.
Depreciation, Depletion and Amortization (DD&A). We estimate that our DD&A rate will be between $ 2.00 and $2.10 per Mcfe during 2005.
Capital Expenditures. We estimate that expenditures for exploration and development will be between $350 million and $400 million in 2005. Some of the factors impacting the level of capital expenditures in 2005 include crude oil and natural gas prices, the volatility in these prices, the cost and availability of oil field services and weather disruptions.
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