Forest Oil Posts Cites Strong Cash Flow, Continued Cost Reductions
Forest Oil has announced financial and operational results for the second quarter of 2009. For the three months ended June 30, 2009, the Company reported the following highlights:
- Average net sales volumes increased 3% to 521 MMcfe/d compared to the second quarter of 2008
- Total cash costs per-unit decreased 6% to $2.32 per Mcfe compared to the second quarter of 2008
- Adjusted net earnings per share decreased 66% to $.52 per share compared to the second quarter of 2008
- Adjusted EBITDA decreased 47% to $199.9 million compared to the second quarter of 2008
- Adjusted discretionary cash flow decreased 54% to $158.0 million compared to the second quarter of 2008
- Adjusted free cash flow increased 35% to $67.6 million compared to the second quarter of 2008
- First operated horizontal Granite Wash well was drilled with an initial production rate of 17 MMcfe/d
- Second operated Red River Parish horizontal Haynesville well was drilled with an initial production rate of 20 MMcfe/d
H. Craig Clark, President and CEO, stated, "The second quarter results were in line with our expectations from a production perspective and better than expected from a cost perspective. We significantly reduced our drilling investment and our rig count in response to our near term view on domestic natural gas prices. The result was substantial free cash flow in the quarter. For the remainder of the year, we will focus our efforts on the Haynesville Shale in East Texas and Northern Louisiana and the Granite Wash in the Greater Buffalo Wallow Area of the Texas Panhandle. Both areas have high quality assets that we feel can be more efficiently exploited with a higher rig count when project economics improve. In the meantime, we will continue to refine drilling and completion processes in these areas, with the intent to increase activity with a focused drilling effort when conditions improve. We will also continue to delever the balance sheet through asset divestitures and free cash flow."
SECOND QUARTER 2009 RESULTS
For the three months ended June 30, 2009, Forest reported net income of $37.1 million or $.36 per basic share. This compares to Forest's net loss of $68.0 million or $(.78) per basic share in the corresponding period in 2008. Net earnings for the three months ended June 30, 2009, were affected by the following items:
- The non-cash effect of net unrealized losses on derivative instruments, totaling $120.5 million ($77.0 million net of tax)
- The non-cash effect of unrealized foreign currency exchange gains, totaling $9.4 million ($7.9 million net of tax)
- The non-cash gain on the change in valuation allowance for deferred tax assets totaling $52.7 million ($52.7 million net of tax)
Without the effects of these items, Forest's adjusted net earnings for the three months ended June 30, 2009, were $53.6 million or $.52 per basic share. This is a decrease of 60% compared to Forest's adjusted net earnings of $135.1 million or $1.51 per basic share in the corresponding 2008 period.
Forest's adjusted EBITDA decreased 47% for the three months ended June 30, 2009, to $199.9 million, compared to adjusted EBITDA of $377.2 million in the corresponding 2008 period. Forest's adjusted discretionary cash flow decreased 54% for the three months ended June 30, 2009, to $158.0 million, compared to adjusted discretionary cash flow of $344.1 million in the corresponding 2008 period.
The decrease in net earnings, EBITDA and discretionary cash flow, each as adjusted, was primarily due to significantly lower realized commodity prices for the three months ended June 30, 2009, compared to the corresponding 2008 period.
Total Cash Costs
Total cash costs per-unit decreased 6% for the three months ended June 30, 2009, to $2.32 per Mcfe compared to $2.47 per Mcfe in the corresponding 2008 period. The decrease in cash costs per-unit was a result of a reduction in operational costs including lease operating expenses, production and property taxes, and general and administrative expense. These decreases were somewhat offset by increased interest expense due to increased debt balances.
Exploration and Development Capital Expenditures
Forest invested $90.5 million in exploration and development activities (excluding capitalized interest, equity compensation, and asset retirement obligations) for the three months ended June 30, 2009, compared to a $294.3 million investment in the corresponding 2008 period. As forecasted, the decrease in exploration and development capital expenditures for the three months ended June 30, 2009, was a result of a significantly reduced rig count. In response to commodity price declines, Forest decreased its operated rig count from 31 in the second quarter of 2008 to three operated rigs currently. When costs and natural gas prices improve, Forest intends to deploy a rig count commensurate with its size and scale. Forest’s current activity is primarily devoted to the Haynesville Shale, Cotton Valley and the Greater Buffalo Wallow Granite Wash programs.
OPERATIONAL PROJECT UPDATE
Greater Buffalo Wallow Area -- Texas Panhandle -- As a large operator in the Greater Buffalo Wallow Area, Forest has extensive resource opportunities in the multiple pay horizons in this play, which it has pursued from both a vertical and most recently from a horizontal perspective. Forest has built an industry leading position over time in the belief that stacked pay sands with significant gas in place would be a good opportunity for the application of emerging technology. Forest believes horizontal drilling in this area will produce favorable economics compared to other plays in North America. As this play develops, Forest will continue to exploit the Granite Wash horizontally and explore the significant horizontal opportunities in the Atoka and the Morrow. Forest's leasehold of 120,000 gross acres (91,000 net) and extensive well database of over 400 vertical tests, in addition to the Company's past horizontal operational experience, should prove to be a competitive advantage in the development of the play.
As previously announced, Forest completed its first operated horizontal well in April of 2009 that produced into the sales line at a rate of 17 MMcfe/d. This well has averaged 7.8 MMcfe/d since its initial production.
Forest currently has one 1500 hp Lantern-operated horizontal drilling rig and three non-operated rigs active in the play with one well waiting on completion.
East Texas/North Louisiana Area -- Haynesville/Bossier/Cotton Valley -- During the second quarter of 2009, Forest announced results from its second horizontal Haynesville Shale well in Red River Parish, Louisiana. The Driver 13-1H (100% WI) produced into the sales line at a rate of 20.3 MMcfe/d with 6500 psi flowing casing pressure in early July 2009. This well has averaged 14.6 MMcfe/d since its initial production. This prolific well was drilled and completed with a horizontal leg of 3,500 feet and a ten-stage frac for a total well cost of approximately $9.0 million.
Forest holds approximately 11,050 net acres in Louisiana which is prospective for the Haynesville Shale and has identified 110 additional potential horizontal locations on this acreage. Forest intends to maintain a one-rig drilling program in Red River Parish for the remainder of 2009 and an additional rig in other prospective areas including drilling of Cotton Valley horizontals.
- Forest Oil to Put Texas Panhandle Properties Up For Sale (Jul 15)
- Forest Oil Partners with Schlumberger on Eagle Ford Shale Land (Apr 12)
- Forest Oil to Sell South Texas Assets Excluding Eagle Ford (Jan 03)