Forest Announces Results for Q4, 2006

Forest Oil Corporation announced financial and operational results for the fourth quarter and full year 2006. The Company reported the following full year 2006 highlights:

--Forest's Remainco reserve replacement ratio was 372% from all capital activities, with finding, development and acquisition costs of $2.15 per Mcfe
--Forest's Remainco net sales volumes were 310 MMcfe/d, an increase of 14% compared to 2005 Remainco
--Adjusted EBITDA was $516 million, an increase of 20% compared to 2005 Remainco
--Discretionary cash flow was $435 million, an increase of 16% compared to 2005 Remainco
--Forest's distribution to shareholders of over $1 billion of Mariner Energy stock

H. Craig Clark, President and CEO, stated, "We had a great year in 2006. Our focus on cost control resulted in operations and investment costs being essentially flat year over year with excellent reserve replacement and associated finding costs. Given the early announcements we have seen so far, we believe our investment and operating cost metrics will hold up very well in industry comparisons this year. We also were able to increase production by 14% with 10% being organically generated. To be able to achieve these attractive results in an environment of elevated service costs and in a year in which much of management's time was devoted to the spin-off of our Gulf of Mexico assets is remarkable. We believe that the assets we have agreed to acquire in the Houston Exploration transaction will generate similar investment results over time. We will employ the same strategy, to extract costs and re-allocate capital, at Houston Exploration that we have successfully employed at Forest."

"Remainco" refers to the portion of Forest not included in the March 2, 2006 spin-off of our Gulf of Mexico operations and subsequent merger of those operations with a subsidiary of Mariner Energy, Inc. We refer to the operations spun-off as "Spinco". When we refer to "Total Company" or "Forest", we mean Remainco or, for the time prior to the spin-off, Remainco and Spinco added together.

SALES VOLUMES

For the year ended December 31, 2006, Remainco's oil and gas sales volumes increased to 310 MMcfe/d or 14% over Remainco's 272 MMcfe/d in the corresponding period in 2005.

ESTIMATED PROVED RESERVES

Forest reported year end estimated proved reserves of approximately 1,455 Bcfe, all of which are located in North America. The estimated proved reserves, which are 71% proved developed, consist of approximately 53% natural gas and 47% liquids. The pre-tax present value of estimated proved reserves at year end, based on constant prices and costs and discounted at 10% totaled $3.3 billion. The valuation was based on year end gas prices of $5.64 per MMbtu and oil prices of $61.05 a barrel NYMEX, compared to gas prices of $10.08 per MMbtu and oil prices of $61.04 a barrel NYMEX one year earlier. Forest's estimated proved reserves were audited by an independent third party engineering firm.

CAPITAL ACTIVITIES

In the fourth quarter of 2006, Forest invested $140 million in exploration and development and acquisition activities.

For the year ended December 31, 2006, Remainco invested $904 million in exploration and development and acquisition activities.

For the year ended December 31, 2006, Remainco invested $904 million in exploration and development and acquisition activities.

FOURTH QUARTER 2006 RESULTS

For the quarter ended December 31, 2006, Forest reported net earnings of $30.8 million or $.49 per basic share. This amount is a decrease of 32% compared to Remainco's net earnings of $45.4 million or $.73 per basic share in the corresponding period in 2005. The net earnings for the quarter ended December 31, 2006 were affected by the following items:

  • Net unrealized gains on derivative instruments and foreign currency exchange effects of $12.3 million ($6.9 million net of tax)
  • Impairment related to expired concessions in Italy of $1.6 million ($1.0 million net of tax)

Without the effect of these items, Forest's net earnings would have been $25.0 million or $.40 per basic share. This amount compares to Remainco's net earnings of $34.5 million or $.56 per basic share in the corresponding 2005 period computed on a comparable basis excluding unrealized gains on derivative instruments of $24.5 million ($15.2 million net of tax) and additional tax expense of $4.3 million ($4.3 million net of tax) relating to a repatriation dividend from Canada. Adjusted earnings in the fourth quarter of 2006 decreased compared to the same period in 2005 despite higher production volumes primarily as a result of lower natural gas prices, higher depreciation and depletion and interest expense and a higher income tax rate.

Forest's income tax rate was 42.1% in the quarter ended December 31, 2006 compared to Remainco's 38.5% for the corresponding period in 2005. The increase in rate was due to adjustments related to state taxes including the expiration of state net operating losses.

Forest's adjusted EBITDA increased 8% compared to Remainco in the fourth quarter of 2005 to $129 million due to higher production volumes. Forest's discretionary cash flow was $102 million, a decrease of 6% compared to Remainco in the fourth quarter of 2005, primarily a result of higher interest expense.

Forest's oil and gas sales revenue decreased 9% during the fourth quarter of 2006 to $184.2 million compared to Remainco's $202.6 million in the fourth quarter of 2005. The decrease was primarily the result of a 36% decrease in natural gas prices partially offset by a 21% increase in natural gas sales volumes.

Forest's per-unit oil and gas production expense decreased 2% to $1.84 per Mcfe in 2006 from Remainco's $1.87 per Mcfe in 2005.

Forest's lease operating expense (LOE) increased 17% to $39.1 million for the quarter ended December 31, 2006 from Remainco's $33.4 million for the corresponding period in 2005. On a per-unit basis, LOE increased 4% to $1.34 per Mcfe in 2006 from Remainco's $1.29 per Mcfe in 2005.

Forest's production and property taxes decreased 24% to $8.3 million during the fourth quarter of 2006 compared to Remainco's $11.0 million during the fourth quarter of 2005. The decrease was primarily attributable to lower wellhead prices and severance tax incentive credits in Texas. As a percentage of oil and natural gas revenue, excluding hedging gains and losses, production and property taxes for the three months ended December 31, 2006 for Forest were 4.5% and in the comparable period of 2005 were 4.9% for Remainco.

General and administrative expense decreased 18% to $9.6 million for the quarter ended December 31, 2006 compared to $11.6 million for the corresponding period in 2005. General and administrative expense on a per-unit basis without stock-based compensation decreased 40% to $.26 per Mcfe for the quarter ended December 31, 2006 compared to $.43 per Mcfe for the corresponding period in 2005. The decrease resulted primarily from reduced insurance expense.

Depreciation and depletion expense increased 13% to $63.5 million for the quarter ended December 31, 2006 from $56.4 million for the corresponding period in 2005. On a per-unit basis, the depreciation and depletion rate was $2.18 per Mcfe for the quarter ended December 31, 2006 compared to $2.17 per Mcfe in the corresponding period in 2005.

2006 RESULTS

For the year ended December 31, 2006, Remainco had net earnings of $161.6 million or $2.60 per basic share. This amount is an increase of 68% compared to Remainco's net earnings of $96.2 million or $1.57 per basic share for the year ended December 31, 2005. The net earnings for the year ended December 31, 2006 were affected by the following items:

  • Net unrealized gains on derivative instruments and foreign currency exchange effects of $69.9 million ($42.0 million net of tax)
  • Stock-based compensation recorded in connection with the Mariner transaction of $5.9 million ($3.6 million net of tax)
  • Non-recurring Spin-off and merger costs associated with the Mariner transaction in the amount of $5.4 million ($5.4 million net of tax)
  • Income from discontinued operations of $3.6 million ($2.4 million net of tax)
  • Reduction in the deferred tax liability of $18.0 million ($18.0 million net of tax) to reflect lower statutory rates in Alberta and a change in the Texas state tax regulations
  • Impairment of a dry hole drilled in Gabon and expired concessions in Italy of $3.7 million ($2.3 million net of tax)

Without the effect of these items, Remainco's net earnings would have been $110.4 million, or $1.77 per basic share. This amount compares to Remainco's net earnings of $111.5 million or $1.82 per basic share in the corresponding 2005 period. The net earnings for the year ended December 31, 2005 were affected by the following items:

  • Unrealized losses on derivative instruments of $12.6 million ($7.8 million net of tax)
  • Non-cash charge of $2.2 million ($1.3 million net of tax) representing the Company's 40% share of a valuation allowance that the Cook Inlet Pipeline Company recorded against a portion of its deferred tax assets
  • Impairment of certain international properties, principally Romania of $2.9 million ($1.8 million net of tax)
  • Additional tax expense of $4.3 million ($4.3 million net of tax) relating to a repatriation dividend from Canada

Adjusted earnings for the year ended December 31, 2006 were similar to 2005 primarily as a result of higher production volumes and higher liquid prices partially offset by lower natural gas prices and higher depreciation and depletion and interest expense.

Remainco's adjusted EBITDA increased 20% in 2006 compared to 2005 to $516 million due to higher production volumes. Remainco's discretionary cash flow was $435 million, an increase of 16% compared to 2005, primarily a result of higher production volumes.

Remainco's oil and gas sales revenue increased 15% for the year ended December 31, 2006 to $768.2 million compared to Remainco's $670.2 million in 2005. The increase was primarily the result of a 26% increase in natural gas sales volumes partially offset by a 15% decline in natural gas prices.

Remainco's per-unit oil and gas production expense decreased 3% to $1.74 per Mcfe in 2006 from Remainco's $1.79 per Mcfe in the same period in 2005.

Remainco's lease operating expense (LOE) increased 13% to $136.6 million for the year ended December 31, 2006 from Remainco's $121.2 million in 2005. However, on a per-unit basis, LOE decreased 1% to $1.21 per Mcfe in 2006 from Remainco's $1.22 per Mcfe in the same period in 2005.

Remainco's production and property taxes decreased 4% to $38.9 million for the year ended December 31, 2006 compared to Remainco's $40.4 million during 2005. The decrease was primarily attributable to severance tax incentive credits in Texas. As a percentage of oil and natural gas revenue, excluding hedging gains and losses, Remainco's production and property taxes for the years ended December 31, 2006 and 2005 were 4.9% and 5.5%, respectively.

For the year ended December 31, 2006, Remainco's general and administrative expense increased 14% to $48.0 million compared to $41.9 million for the corresponding period in 2005. The increase for the year resulted primarily from stock-based compensation offset by decreased salaries and wages as a result of fewer employees following the Spin-off.

For the year ended December 31, 2006, Remainco's general and administrative expense on a per-unit basis without stock-based compensation decreased 27% to $.30 per Mcfe compared to $.41 per Mcfe for the corresponding period in 2005. The decrease for the year resulted primarily from decreased salaries and wages as a result of fewer employees following the Spin-off.

For the year ended December 31, 2006, Remainco's depreciation and depletion expense increased 20% to $244.7 million from $204.3 million for the corresponding period in 2005. On a per-unit basis, the depreciation and depletion rate was $2.16 per Mcfe for 2006 compared to $2.06 per Mcfe in 2005. The increase for the year ended December 31, 2006 compared to 2005 is primarily due to higher estimated drilling and completion costs on future development activities.

OPERATIONAL PROJECT UPDATE

WESTERN BUSINESS UNIT

In 2006, the Western Business Unit drilled 265 gross wells with a 99% success rate.

Buffalo Wallow Area - Texas Panhandle (66-100% WI) - During the fourth quarter, 13 wells were drilled with a 100% success rate, bringing the total drilling well count for 2006 to 57 wells, also at a 100% success rate. Forest also increased net production to a record 40 MMcfe/d during the quarter. Forest's gross acreage position increased 37% during the year to 45,400 acres. Recent offset drilling at Frye Ranch has yielded two completions that tested 4.4 MMcfe/d and 2.7 MMcfe/d.

Greater Vermejo/Haley Area - West Texas (42-100% WI) - Forest continues to operate one drilling rig and one re-entry rig. The latest re-entry tested 1.1 MMcfe/d. There are three re-entries planned for the first quarter of 2007. Forest increased its 2006 gross acreage position by 51% to a total of 45,700 acres. The large 3-D seismic survey over this area is expected to be processed by mid-2007.

Central Midland Basin - West Texas (100% WI) - A total of 21 wells were drilled with a 100% success rate. Initial production rates ranged from 55 to 376 Boe/d on the shallow oil programs. The 2006 program increased gross production at the Tex-Mex field by 58%. An additional 726 gross acres were recently acquired to extend the western side of the field. Forest has initiated an infill drilling program on the Martin Field following the acquisition of our partner's 50% WI in the field. At year end 2006, Forest has identified approximately 1,200 potential locations on its acreage position in the Central Midland Basin.

SOUTHERN BUSINESS UNIT

In 2006, the Southern Business Unit drilled 56 gross wells with an 89% success rate.

East Texas Cotton Valley Area - Rusk, Harris & Panola Counties, Texas (52-100% WI) - During the fourth quarter, 16 wells were drilled with a 100% success rate. Total net production reached a record 21 MMcfe/d in the fourth quarter, a 54% increase since closing the acquisition on March 31, 2006. First sales into Forest's new low-pressure gathering and processing facilities were initiated on January 1, 2007. All production is expected to be tied into these facilities by the end of the third quarter 2007.

Katy Field - Waller, Harris and Ft. Bend Counties, Texas (54% WI) - Gross production increased from 13 MMcfe/d to 20 MMcfe/d in the fourth quarter as a result of Forest's activity since taking over operations in August 2006. Five shallow Frio wells were drilled in the fourth quarter with IP's averaging 930 Mcfe/d. The first Middle Wilcox well was drilled and recently completed at an initial rate of 2.5 MMcfe/d. The second Middle Wilcox well is drilling using the newly commissioned Lantern Rig #10. A nine well Wilcox recompletion / re-entry program was started in the first quarter of 2007. Additional compression is also being installed to handle the increased volumes and optimize gathering infrastructure in the field.

Sabine Area - Calcasieu Parish, Louisiana (23-45% WI) - Forest participated in the drilling of a successful exploration well on the Company's large Sabine acreage position. The well was completed at a rate of 5.2 MMcfe/d and is currently flowing to sales. Additional 3-D seismic is being shot over 131 square miles, and is expected to be completed by mid-2007.

Barnett Shale - Hill County, Texas (50% WI) - The first horizontal well on Forest's JV acreage position was fracture stimulated and is currently producing up the casing at 2.1 MMcfe/d. The second well is underway with Forest conducting operations.

CANADA BUSINESS UNIT

In 2006, the Canada Business Unit drilled 60 gross wells with a 100% success rate.

Wild River Area - Alberta, Canada (25-100% WI) - A total of 10 wells were drilled during the fourth quarter at a 100% success rate. The average initial production rate for these wells was 3 MMcfe/d, the best average rates to date. Net production reached a record 37 MMcfe/d during the quarter despite major compression repairs in the fourth quarter. A new gas processing plant with improved NGL recoveries and lower gathering fees is expected to be in service in the second quarter of 2007.

Sundance/Ansell Area - Alberta, Canada (50% WI) - Two additional exploratory wells were completed at rates of 2.0 MMcfe/d and 2.6 MMcfe/d. A third well reached TD and is awaiting completion. Deep rights in five additional sections were acquired in the fourth quarter, increasing our gross acreage position to 26,200 acres. Two additional wells are planned in the first quarter of 2007.

Hinton Area - Alberta, Canada (33-50% WI) - The second exploratory well was successful and is testing at a rate of 6.5 MMcfe/d, the best Forest interest well in the area to date. A follow-up delineation well is currently drilling. Forest holds 9,000 gross acres in this field.

Copton/Palliser/Narraway Areas - Alberta Foothills, Canada (50% WI) - The Copton 10-33 exploratory well was completed at a rate of 2 MMcfe/d. A second exploratory well is currently drilling in the Palliser area. The West Narraway pipeline is expected to be in service in the second quarter of 2007 to bring the Narraway 13-2 (4.8 MMcfe/d) on-line.

2007 GUIDANCE

The guidance below represents Forest's guidance for 2007 without consideration of the announced acquisition of The Houston Exploration Company (Houston Ex) or the announced intended sale of its Alaska properties. It is based on estimated exploration and development capital expenditures approximately 15% less than the Company spent in 2006. The Company intends to revise its guidance when it closes the acquisition of Houston Ex and sells its Alaska properties.

Daily Production. We estimate that our 2007 daily average production will be in the range of 320 to 340 MMcfe/d for the full year of 2007. In the first quarter, we estimate that production will be adversely affected by 1.2 Bcfe due to severe winter weather downtime and crude transportation issues related to refinery outages in the Texas of Panhandle.

Liquids Production. We estimate that our 2007 daily average production of oil and natural gas liquids will be between 21,000 and 23,000 Bbls/d.

Gas Production. We estimate that our 2007 daily average natural gas production will be between 195 and 205 MMcf/d.

Gas Differentials. Based on current market prices, we estimate that our first quarter 2007 gas price differential from NYMEX will be between $1.25 and $1.50 per Mcf.

Liquids Differentials. Based on current market prices, we estimate that our first quarter 2007 liquids price differential from NYMEX will be between $10.00 and $13.00 per Bbl.

Production Expense. Our oil and gas production expense (which includes LOE, ad valorem taxes, production taxes and product processing, 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 2007 production expense will be between $205 million and $215 million.

General and Administrative Expense (G&A). We estimate our 2007 G&A expense, exclusive of non-cash charges relating to FAS 123 will be between $38 million and $42 million.

Stock-based Compensation (FAS 123) Expense. We estimate that we will incur non-cash charges pursuant to FAS 123 of approximately $13 million in 2007.

Depreciation, Depletion and Amortization (DD&A). We estimate that our 2007 DD&A rate will be between $2.20 and $2.30 per Mcfe during 2007.

Capital Expenditures. We estimate that expenditures for exploration and development will be between $480 million and $520 million in 2007. Some of the factors impacting the level of capital expenditures in 2007 include the cost and availability of oil field services and weather disruptions.

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. 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 and meteorological events (including, but not limited to severe weather, hurricanes and earthquakes). 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.

Forest Oil Corporation is engaged in the acquisition, exploration, development, and production of natural gas and crude oil in North America and selected international locations. Forest's principal reserves and producing properties are located in the United States in Alaska, Louisiana, New Mexico, Oklahoma, Texas, Utah, and Wyoming, and in Canada.

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