Forest Oil Reports 2Q10 Financial, Operational Results
Forest Oil announced financial and operational results for the second quarter of 2010.
The Company reported the following highlights:
- Net sales volumes of 464 MMcfe/d organically increased 11% from the first quarter of 2010
- Production expense of $1.11 per Mcfe decreased 4% from the corresponding 2009 period
- Adjusted net earnings of $48.2 million or $0.42 per diluted shared decreased 10% and 19%, respectively, from the corresponding 2009 period
- Adjusted EBITDA of $181.0 million and adjusted discretionary cash flow of $142.6 million decreased 9% and 10%, respectively, from the corresponding 2009 period
- Year to date non-core asset divestitures of $155 million
- Added 90 Bbtu/d of 2011 natural gas hedges at an average of $5.86 per MMbtu
H. Craig Clark, President and CEO, stated, "The results achieved in the second quarter demonstrate the growth potential and quality of the Company's asset base. We have the ability to annually grow net sales volumes at double digit rates at attractive rates of return while spending near our cash flow. The strong growth was particularly notable in the Texas Panhandle, where our newly drilled wells produced at average initial rates of 27 MMcfe/d. The growth from the Texas Panhandle, along with the other core assets in the portfolio, has resulted in an increase to our net sales volume guidance for 2010. This is despite divesting 16 MMcfe/d of non-core properties. As a result of a significant project inventory in our core areas we expect the asset base to continue to yield growth well into the future."
SECOND QUARTER 2010 RESULTS
For the three months ended June 30, 2010, Forest reported net earnings of $33.3 million or $0.29 per diluted share. This compares to Forest's net earnings of $37.1 million or $0.36 per diluted share in the corresponding 2009 period. Net earnings for the three months ended June 30, 2010, were affected by the following items:
- The non-cash effect of net unrealized losses on derivative instruments totaling $9.5 million ($6.0 million net of tax)
- The non-cash effect of unrealized foreign currency exchange losses totaling $10.6 million ($8.9 million net of tax)
Without the effects of these items, Forest's adjusted net earnings for the three months ended June 30, 2010, were $48.2 million or $0.42 per diluted share. This is a decrease of 10% and 19%, respectively, compared to Forest's adjusted net earnings of $53.6 million and $0.52 per diluted share in the corresponding 2009 period. Forest's adjusted EBITDA decreased 9% for the three months ended June 30, 2010, to $181.0 million, compared to adjusted EBITDA of $199.9 million in the corresponding 2009 period. Forest's adjusted discretionary cash flow decreased 10% for the three months ended June 30, 2010, to $142.6 million, compared to adjusted discretionary cash flow of $158.0 million in the corresponding 2009 period.
The decrease in net earnings, EBITDA and discretionary cash flow, each as adjusted, was primarily due to lower net realized commodity prices (including realized derivative gains) for the three months ended June 30, 2010, compared to the corresponding 2009 period.
Net Sales Volumes, Average Realized Prices, and Revenues
Forest's average net sales volumes organically increased 11% for the three months ended June 30, 2010, to 464 MMcfe/d, compared sequentially to the first quarter of 2010 and 3% compared to the corresponding 2009 period, pro forma for divestitures.
Forest's average oil and natural gas liquids (NGLs) sales volumes increased to 25% of total equivalent net sales volumes for the three months ended June 30, 2010, compared to 22% in the first quarter of 2010.
Year to date non-core asset divestitures yielded proceeds of approximately $155 million, and included oil and gas properties with associated net sales volumes of 16 MMcfe/d and estimated proved reserves of 61 Bcfe at December 31, 2009 (approximately $47 million of these asset divestitures closed in July of 2010). In addition to these divestitures, Forest intends to divest its gathering system assets in East Texas by the end of the third quarter of 2010.
OPERATIONAL PROJECT UPDATE
Forest expects to run 10 to 12 rigs for the remainder of 2010 in its core development and exploration areas as detailed below:
Texas Panhandle – Granite Wash
Forest drilled and completed four wells in the second quarter of 2010, not including previously announced wells, that had an average initial 24-hour production rate of 27 MMcfe/d.
The results from the four most recently completed Texas Panhandle wells maintain Forest's total average 24-hour initial production rates from its horizontal Granite Wash program at 29 MMcfe/d, of which 57% of the equivalent rate is attributable to liquids. Notably, not only do Granite Wash wells have high 24-hour initial production rates, the wells also have high cumulative production rates in the first year. Well #8 produced nearly 3.5 Bcfe since being completed in early April 2010 with 63% of the equivalent production being liquids. This well was completed in a different zone than all other horizontal wells completed in the area. Forest is currently drilling three additional wells which are expected to be completed in that same zone.
For the six months ended June 30, 2010, Forest added 11,000 gross acres (8,000 net) in the Texas Panhandle, resulting in a total of approximately 146,000 gross acres (102,000 net) in the play. The Company intends to run five rigs in the play for the remainder of 2010.
Canadian Deep Basin – Nikanassin Resource Play
Forest drilled two wells in the second quarter of 2010, not including previously announced wells, for which completion operations are underway. The wells are expected to be put to sales during the third quarter of 2010. Spring break up and road bans in the Canadian Foothills delayed the completion operations as is customary in the late spring and early summer months. Since inception, Forest has drilled and completed 12 wells in its Nikanassin resource play. Average 24-hour initial production rates were 14 MMcfe/d from this program. Separately, Forest has approximately 25 – 30 MMcfe/d of net production shut-in awaiting completion of infrastructure projects. These projects are expected to be completed in the third quarter of 2010 with production placed to sales in the fourth quarter of 2010.
For the six months ended June 30, 2010, Forest added 35,000 gross acres (35,000 net) in the Nikanassin resource play, resulting in a total of approximately 121,000 gross acres (80,000 net) in the play. The Company intends to run two rigs in the play for the remainder of 2010.
East Texas, North Louisiana – Haynesville / Bossier Shale
Forest drilled and completed five wells in the second quarter of 2010, not including previously announced wells. The first three wells had an average initial 24-hour unrestricted production rate of 18 MMcfe/d. In order to optimize recovery from Haynesville / Bossier Shale wells, Forest is testing a restricted flow rate production program. Under this program, initial production rates from the last two wells were curtailed at 13 – 14 MMcfe/d. Initial results have indicated that cumulative production from the restricted rate wells are forecasted to exceed the cumulative production from comparable unrestricted wells at a period of approximately 90 days.
For the six months ended June 30, 2010, Forest added 25,200 gross acres (16,700 net) in the core area of Haynesville / Bossier Shale, which includes Red River and Sabine Parishes, Louisiana and Shelby County, Texas, resulting in a total of approximately 40,200 gross acres (27,900 net) in this portion of the play. In addition, Forest holds approximately 62,700 gross acres (44,400 net) prospective for the Haynesville / Bossier Shale primarily in Harrison, Panola, and Rusk Counties, Texas. The Company intends to run three rigs in the play for the remainder of 2010.
Gonzales, Lee, Wilson, Atascosa, and DeWitt Counties, Texas – Eagle Ford Shale
Forest has been actively acquiring acreage in the Eagle Ford Shale since 2009. As of June 30, 2010, Forest holds approximately 106,000 gross acres (102,000 net) prospective for the Eagle Ford Shale, of which approximately 77% of the acreage is in the Gonzales, Wilson, and Atascosa County oil window.
Forest is currently shooting seismic and expects to commence drilling with one rig in the fourth quarter of 2010.
NATURAL GAS AND OIL DERIVATIVES
As of August 2, 2010, Forest had natural gas and oil derivatives in place for the remainder of 2010 covering the aggregate average daily volumes and weighted average prices shown below. The NYMEX derivatives provide price protection on an estimated 67% and 42% of the midpoint of Forest's remaining guided 2010 natural gas and oil net sales volumes, respectively. Forest also commenced its 2011 natural gas hedge program with the addition of 90 Bbtu/d of swaps at an average price of $5.86 per MMbtu. In connection with these swaps, the Company sold natural gas swaptions for 50 Bbtu/d for 2011 at $5.80 per MMbtu. Also, Forest sold a 1.0 MBbls/d oil call option for 2011 at $90.00 per Bbl and a 1.0 MBbls/d oil swaption for 2012 at $90.00 per Bbl. None of these natural gas and oil derivatives contains knock-out provisions that would cause a derivative to cease to exist at prices below an established threshold. The derivative counterparties consist primarily of commercial banks that are lenders under our credit facilities, or affiliates of such banks.
UPDATED 2010 GUIDANCE
Oil and Gas Net Sales Volumes: As a result of the strong performance from Forest's drilling program, Forest increased guidance for average net sales volumes to a range of 443 to 453 MMcfe/d in 2010 from its previously guided range of 439 to 449 MMcfe/d. This increase includes the negative effect of net sales volumes associated with divestitures of 16 MMcfe/d in the first half of 2010. Organic net sales volume growth for the fourth quarter of 2010 compared to the fourth quarter of 2009, pro forma for asset divestitures, is expected to be approximately 17% to 19%. Net sales volumes are expected to be comprised of approximately 72.5% natural gas and 27.5% liquids (13.75% crude and condensate and 13.75% natural gas liquids).
Price Differentials: 2010 price differential guidance below does not include the effects of oil derivatives Forest has in place for 2010.
Based on current prices, Forest expects oil price differentials for the second half of 2010 will average $7.00 to $9.00 per Bbl less than the NYMEX West Texas Intermediate (WTI) price.
Based on current prices, Forest expects NGL realizations for the second half of 2010 will average 37.5% to 40% of the WTI price.
Production Expense: As a result of cost cutting initiatives employed in the first half of 2010, Forest decreased guidance for production expense (which includes lease operating expense, ad valorem taxes, production taxes, and product processing, gathering and transportation) to a range of $185 million to $205 million, or $1.12 to $1.27 per Mcfe, from its previously guided range of $190 million to $210 million, or $1.17 to $1.30 per Mcfe.
Exploration and Development Capital: As a result of increased drilling activity for liquids in the Texas Panhandle Granite Wash, Forest intends to invest in the upper end of the range of $600 million and $700 million (excluding capitalized interest, capitalized stock-based compensation, asset retirement obligations incurred, acquisitions, and leasehold acquisitions).
- 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)