Forest Oil Corp. (FST) recently entered into a definitive agreement with SandRidge Exploration and Production LLC, a wholly owned subsidiary of SandRidge Energy Inc., (SD) to sell the remainder of its Permian Basin properties in West Texas and New Mexico for approximately $800 million. In August 2009, Forest had sold certain operated and non-operated properties in these areas for approximately $118 million.

The properties considered for sale are currently producing 46 million cubic feet equivalent per day (MMcfe/d). It has estimated proved reserves of 321 billion cubic feet equivalent (Bcfe), 67% of which is proved developed as of Dec 31, 2008. The agreement is subject to approvals and expected to close on or before Dec 31, 2009.

In November 2009, the company also sold some of its non-core (primarily non-operated) assets in the Deep Basin in Alberta, Canada, for approximately $38 million. This transaction brings Forest’s non-core Canadian property sale in 2009 to approximately $100 million.

These assets were cumulatively producing 11 MMcfe/d and had 65 Bcfe of estimated proved reserves as of Dec 31, 2008. The company expects to sell the rest of its non-core Canadian properties in early 2010. For 2009, Forest has a plan to divest properties for proceeds in excess of $1 billion.

Forest has been actively marketing its Permian basin assets divesture program in order to position for increased activity and to decrease the overall debt position. This transaction will definitely assist the company to focus on its ongoing development efforts in North American operated tight-gas and shale resource plays that have higher growth opportunities with very attractive returns.

While the proceeds from the divestiture is a big support to Forest’s liquidity position, it also helps the company to significantly ramp up its activity on core development assets in the Granite Wash and Haynesville Shale in the U.S. and core Deep Basin assets in Canada.

It is still too early to tell whether Forest Oil’s strategic shift to a low-risk acquisition/ development/ exploitation strategy and toward a longer-lived onshore asset base will pan out. While the company’s long-term outlook has improved, we see better opportunities in this space elsewhere and maintain our Neutral recommendation.

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