Forest Oil Reports Record Earnings



Forest Oil Corporation (NYSE:FST) reported financial and operational results for the fourth quarter and full year 2005.

H. Craig Clark, President and CEO, stated, "2005 was a pivotal year for Forest as we were able to complete the repositioning of our portfolio while arranging a substantial dividend to our shareholders. Our transaction with Mariner Energy, in addition to our recent onshore acquisitions, creates two attractive portfolios for our shareholders. We have made significant progress in 2005 on the remaining Forest onshore assets by replacing 281% of production at an all-in FD&A cost of $2.16 per Mcfe while lowering the PUD percentage from the previous year. Our recent East Texas Cotton Valley acquisition essentially replaces reserves for 2006 and provides another growth area with both near term and future impact. We believe we achieved our primary goal in 2005 by beginning to unlock the intrinsic value of our shares for Forest Oil shareholders."

For the year ended December 31, 2005, the Company had the following highlights:

  • Record earnings of $152 million, a 24% increase over 2004 on record revenues of almost $1.1 billion.
  • Record discretionary cash flow of $654 million, a 15% increase over 2004.
  • Record adjusted EBITDA of $717 million, a 13% increase over 2004.
  • Drilling well counts for 2005 increased to a record 392 (196 without San Juan Basin wells), with a 97% success rate.
  • Remainco Fourth Quarter Production Increases to 283 MMcfe/d, a Sequential Growth Rate of 6%
  • Wild River Net Production Increases 25% Sequentially to a Record 25 MMcfe/d in the Quarter
  • Buffalo Wallow Net Production Increases 6% Sequentially to a Record 34 MMcfe/d in the Quarter
  • Remainco Reserve Replacement Ratio of 281% from all Capital Activities, with a Finding, Development and Acquisition Cost of $2.16 per Mcfe
  • Hurricane Activity Defers 10 Bcfe of Fourth Quarter Production

SPIN-OFF

Forest announced on September 12, 2005 that it intends to spin-off to its shareholders its offshore Gulf of Mexico operations, and that the Gulf of Mexico operations would immediately thereafter be acquired in a merger transaction by Mariner Energy, Inc. (Mariner). On February 10, 2006, Forest announced this special stock dividend, which will consist of approximately 50.6 million shares of Forest Energy Resources, Inc. (FERI), representing 100% of its subsidiary that holds its offshore Gulf of Mexico operations (Spinco), will be payable to Forest shareholders of record on February 21, 2006. Pursuant to the terms of the dividend, each shareholder of record on February 21, 2006 will receive approximately .8 shares of FERI common stock. Immediately thereafter, FERI will merge with a subsidiary of Mariner, with each share of FERI exchanged for one share of Mariner. The dividend and the merger are subject to Mariner stockholders voting in favor of the merger and satisfaction or waiver of other closing conditions. The transaction is expected to be non-taxable to Forest and its shareholders and is anticipated to close on or about March 2, 2006.

After the spin-off and merger, Mariner will be a separately traded public company that will own and operate the combined businesses of Mariner and Forest's Gulf of Mexico operations, and Mariner's common stock will be traded on the New York Stock Exchange under the symbol "ME." The remaining assets (Remainco) will be operated by Forest and will be a long-lived onshore resource company with a significant drilling inventory and a proven acquisition track record in North America.

FOURTH QUARTER 2005 RESULTS

For the quarter ended December 31, 2005, Forest reported net earnings of $57.2 million or $.92 per basic share. This amount compares to net earnings of $43.6 million or $.73 per basic share in the corresponding period in 2004. Net earnings in the fourth quarter of 2005 were affected by the following items:

-- Unrealized gains of $53.0 million ($32.8 million after-tax) primarily related to hedges that, under accounting rules, no longer qualified for hedge accounting due to Hurricanes Katrina and Rita production deferrals.

-- Additional tax expense of $4.3 million ($4.3 million after-tax) relating to a repatriation dividend from Canada.

Without the effect of these items, Forest's net earnings would have been $28.7 million, or $.46 per basic share.

These amounts compare to net earnings of $42.2 million or $.71 per basic share in the corresponding 2004 period computed on a comparable basis excluding the following item:

-- Unrealized gains of $2.3 million ($1.4 million after-tax) related to acquired collars that, under accounting rules, do not qualify for hedge accounting.

Forest realized hedge losses during the fourth quarter of 2005, which recognition was required to be deferred until the first quarter of 2006 to correspond with the timing of production that was deferred from Hurricanes Katrina and Rita. The total deferred amount realized but not recognized in the fourth quarter was $15.2 million.

For the fourth quarter of 2005, Forest's sales volumes were 386.4 MMcfe/d or a decrease of 23% compared to the fourth quarter of 2004. Impacts from the hurricanes deferred approximately 10 Bcfe (109 MMcfe/d), of which .7 Bcfe (8 MMcfe/d) relates to Remainco. Remainco production volumes averaged 282.7 MMcfe/d in the fourth quarter, an increase of 7% from the fourth quarter of 2004.

The Company's adjusted EBITDA decreased 21% compared to the fourth quarter of 2004 to $147.6 million, due to lower production volumes and significantly wider price differentials for natural gas. During the fourth quarter of 2005, discretionary cash flow was $134.8 million.

2005 RESULTS

For the year ended December 31, 2005, Forest reported net earnings of $151.6 million or $2.47 per basic share, a 24% increase compared to net earnings of $122.6 million or $2.15 per basic share in the corresponding 2004 period. Net earnings in the year ended December 31, 2005 were affected by the following items:

-- Unrealized losses of $21.4 million ($13.2 million after-tax) primarily related to hedges that, under accounting rules, no longer qualified for hedge accounting due to Hurricanes Katrina and Rita production deferrals.

-- A pre-tax, non-cash charge of $2.2 million ($1.3 million after-tax) representing our 40% share of a valuation allowance that Cook Inlet Pipeline Company ("CIPC") recorded against a portion of its deferred tax assets.

-- Additional tax expense of $4.3 million ($4.3 million after-tax) relating to a repatriation dividend from Canada.

Without the effect of these items, Forest's adjusted net earnings would have been $170.4 million, or $2.78 per basic share. These amounts compare to net earnings of $123.3 million or $2.17 per basic share in the corresponding 2004 period computed on a comparable basis excluding the following item:

-- Unrealized losses of $1.1 million ($.7 million after-tax) related to acquired collars that, under accounting rules, do not qualify for hedge accounting.

For the year ended December 31, 2005, Forest's sales volumes were 452.7 MMcfe/d or a decrease of 4% compared to the corresponding period in 2004 due to storm related downtime in 2005 which reduced volumes approximately 16 Bcfe (44 MMcfe/d) for all of 2005, of which 1.1 Bcfe (3 MMcfe/d) relates to Remainco. Remainco production volumes averaged 272.4 MMcfe/d in 2005, an increase of 9% from 2004.

The Company's adjusted EBITDA increased 13% compared to the corresponding period in 2004 to $716.6 million, due to higher per unit netbacks. During 2005, discretionary cash flow was $654.1 million.

At December 31, 2005, net debt increased 6% to $847 million compared to $797 million at December 31, 2004. The year-over-year increase in net debt was primarily due to approximately $235 million of debt incurred for the acquisition of the Buffalo Wallow field in the second quarter of 2005, offset by discretionary cash flow, proceeds from the exercise of stock options and warrants and property sales. The Company had a net debt to total book capitalization of 33% at December 31, 2005 compared to 35% at December 31, 2004.

RESERVES

Forest reported year-end estimated proved reserves of approximately 1,467 Bcfe, all of which are located in North America and 21% related to Spinco. The estimated proved reserves consist of approximately 60% natural gas and 40% oil. Forest and Remainco proved developed reserves are 73% and 75% of total proved reserves, respectively, at December 31, 2005. Forest's proved reserves were audited by independent third party engineering firms.

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