(FST) Forest Oil Updates Forecast

An independent oil and gas company Forest Oil Corporation (FST) provided guidance for the second quarter as well as second half of 2011. The company’s forecasts are mainly reflective of the more oil-weighted development initiatives through the expansion of its Eagle Ford Shale drilling program and the commencement of drilling activity in the Wolfcamp Shale oil play.

For the second quarter of 2011, Forest Oil expects net sales volumes to average between 333 million and 337 million cubic feet equivalent per day (MMcfe/d), which exclude its Canadian operations held by Lone Pine Resources Inc.

Second quarter production experienced a 7 MMcfe/d downtime in Texas Panhandle and South Louisiana. Additionally, the divestiture of the Wilson County also restricted production.

The company projected exploration and development capital expenditures to range between $190 million and $210 million for the second quarter. Forest Oil has already drilled four wells in Eagle Ford and Granite Wash Shale plays. In an effort to increase oil centric projects, the company expanded its Eagle Ford Shale acreage by 4,000 net acres to 113,000 net acres and initiated a drilling program in a new acreage position in Crockett County, Texas.

For the second half of 2011, excluding Lone Pine’s operations, Forest oil expects net sales volumes to range from 335 MMcfe/d to 345 MMcfe/d, with 70% natural gas and the remaining being oil. The company anticipates using between $350 million and $375 million on exploration and development during the same six months. Total cash costs are expected to range between $168 million and $178 million, or $2.64 and $2.88 per thousand cubic feet equivalent (Mcfe).

Denver-based Forest Oil Corporation is an independent oil and gas company engaged in acquisition, exploration, production and development of oil and gas properties in North America. The company operates five distinct geographic business units –– Canada, Eastern, Southern, Western and International. Its principal reserves and producing properties are located in Arkansas, Louisiana, New Mexico, Oklahoma, Texas, Utah, Wyoming and Canada.

Last quarter, the company registered a 2% year-over-year increase in its net sales volumes to 425.3 MMcfe/d. Its earnings came in below our expectation mainly due to lower natural gas price realization. We like Forest Oil’s initiatives toward increased liquids production. The company’s focus on cost control and the upside from Wolfcamp Shale and Eagle Ford Shale position it well to weather the weakness in natural gas prices.

However, considering its debt-heavy balance sheet (with a debt-to-capitalization ratio of 57.8% in the first quarter of 2011), as well as its weak reserves growth profile, we remain on the sidelines for the time being. Hence, we expect the stock to perform in line with its peer, Cabot Oil & Gas Corp (COG).  Forest Oil currently holds a Zacks #3 Rank (short-term Hold rating).

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