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| FST > SEC Filings for FST > Form 10-Q on 6-Nov-2009 | All Recent SEC Filings |
6-Nov-2009
Quarterly Report
OVERVIEW
Forest Oil Corporation ("Forest") is an independent oil and gas company engaged in the acquisition, exploration, development, and production of natural gas and liquids in North America. Forest was incorporated in New York in 1924, as the successor to a company formed in 1916, and has been a publicly held company since 1969. Unless the context otherwise indicates, references in this quarterly report on Form 10-Q to "Forest," "we," "ours," "us," or like terms refer to Forest Oil Corporation and its subsidiaries.
We currently conduct our operations in three geographical segments and five business units. The geographical segments are: the United States, Canada, and International. The business units are: Western, Eastern, Southern, Canada, and International. We conduct exploration and development activities in each of our geographical segments; however, substantially all of our estimated proved reserves and all of our producing properties are located in North America. Our total estimated proved reserves as of December 31, 2008 were approximately 2,668 Bcfe. At December 31, 2008, approximately 87% of our estimated proved oil and natural gas reserves were in the United States, approximately 11% were in Canada, and approximately 2% were in Italy. Approximately 75% of our estimated proved reserves were natural gas as of December 31, 2008. See Note 12 to the Condensed Consolidated Financial Statements for additional information about our geographical segments.
The following discussion and analysis should be read in conjunction with Forest's Condensed Consolidated Financial Statements and Notes thereto, the information under the headings "Forward-Looking Statements" and "Risk Factors," below, and the information included in Forest's 2008 Annual Report on Form 10-K under the headings "Risk Factors," and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Third Quarter and Year-to-Date 2009 Summary
º •
º Oil and gas production in the third quarter of 2009 decreased 9% to 44
Bcfe from 48 Bcfe in the corresponding period in 2008. Oil and gas
production in the first nine months of 2009 increased 2% to 141 Bcfe
from 137 Bcfe in the corresponding period in 2008. See "Results of
Operations-Oil and Gas Production and Revenues" for further discussion
of production fluctuations.
º •
º Oil and gas revenues decreased 63% in the third quarter of 2009 to
$177 million from $474 million in the corresponding period in 2008 and
59% in the first nine months of 2009 to $553 million from $1.4 billion
in the corresponding period in 2008. The decrease in each period was
due to a significant decline in oil and gas commodity prices in 2009
compared to 2008.
º •
º Capital expenditures for exploration, development, and acquisition
activities decreased 82% in the first nine months of 2009 to
$432 million from $2.3 billion in the corresponding period in 2008.
See below for further discussion of the decrease.
º •
º Sales of non-core oil and gas properties totaled $146 million in the
first nine months of 2009. We also entered into a definitive agreement
in October 2009 to sell certain non-core oil and gas properties in
Canada for approximately $58 million, with such transaction expected
to close in the fourth quarter of 2009. We plan to market additional
non-core oil and gas properties in Canada and in the Permian Basin in
West Texas and expect to complete those divestitures during the first
half of 2010.
º •
º Forest issued $600 million in principal amount of 81/2% senior notes
due 2014 at 95.15% of par in February 2009 for net proceeds of
$560 million, after deducting initial purchaser discounts.
Proceeds from the 81/2% senior notes were used to pay down outstanding balances on Forest's U.S. credit facility. As a result of this issuance, Forest's borrowing base under its credit facilities was lowered from $1.8 billion to $1.62 billion effective February 17, 2009, with such borrowing base being reaffirmed by Forest's lenders in October 2009.
º •
º Forest issued approximately 14 million shares of common stock at a
price of $18.25 per share in May 2009. Net proceeds from this offering
were $256 million, after deducting underwriting discounts and
commissions and offering expenses. Forest used the net proceeds from
the offering to repay a portion of the outstanding borrowings under
its U.S. credit facility.
º •
º Forest recorded a $1.6 billion non-cash ceiling test write-down as of
March 31, 2009 caused by a significant decline in spot natural gas
prices during the first quarter. See-"Critical Accounting Policies,
Estimates, Judgments, and Assumptions-Full Cost Method of Accounting"
for more information about the nature of ceiling test write-downs.
RESULTS OF OPERATIONS
Due to the downturn in the global economy in mid-to-late 2008, demand for oil and natural gas has fallen significantly, resulting in a dramatic decrease in oil and natural gas prices in 2009 as compared to 2008. For example, the average realized price we received for natural gas in the third quarter of 2009 was 65% lower than the price we received in the third quarter of 2008 and the average realized price we received for oil was 44% lower over the same period. As a result of the decreases in commodity prices, our reported earnings and cash flow in 2009 are significantly lower than they were during the same periods in 2008. The decrease in commodity prices also impacted the level of our capital expenditures in 2009 as we intend to keep our full-year exploration and development capital expenditures within our cash flow from operations before changes in working capital. This level of capital expenditure activity is intended to maintain financial flexibility and sufficient liquidity to maintain our assets and operations until margins on oil and gas production improve.
For the third quarter 2009, Forest reported net earnings of $172 million, or $1.53 per basic share, compared to net earnings of $429 million, or $4.77 per basic share, in the third quarter 2008. The decrease was primarily attributable to a significant decline in oil and gas prices, as discussed above, partially offset by a decrease in the deferred tax asset valuation allowance in the third quarter 2009. For the first nine months of 2009, Forest reported a net loss of $968 million, or $9.46 per basic share, compared to net earnings of $356 million, or $3.99 per basic share, during the same period of 2008. The $968 million net loss in the first nine months of 2009 was due primarily to a $1.6 billion non-cash ceiling test write-down recorded in the first quarter of 2009, which was caused by a significant decline in spot natural gas prices during the first quarter of 2009. (See-"Critical Accounting Policies, Estimates, Judgments and Assumptions-Full Cost Method of Accounting" for information on this ceiling test write-down.) Discussion of the components of the changes in our quarterly and year-to-date results follows.
Oil and Gas Production and Revenues
Production volumes, revenues, and average sales prices by product and
location for the three and nine months ended September 30, 2009 and 2008 are set
forth in the tables below.
Three Months Ended September 30,
2009 2008
Gas Oil NGLs Total Gas Oil NGLs Total
(MMcf) (MBbls) (MBbls) (MMcfe) (MMcf) (MBbls) (MBbls) (MMcfe)
Production
volumes:
United
States 27,337 810 682 36,289 29,942 905 836 40,388
Canada 6,246 149 54 7,464 5,808 205 73 7,476
Totals 33,583 959 736 43,753 35,750 1,110 909 47,864
Revenues (in
thousands):
United
States $ 80,810 52,768 17,661 151,239 255,627 105,209 45,648 406,484
Canada 15,912 8,531 1,502 25,945 40,464 21,659 5,630 67,753
Totals $ 96,722 61,299 19,163 177,184 296,091 126,868 51,278 474,237
Average sales
price:
United
States $ 2.96 65.15 25.90 4.17 8.54 116.25 54.60 10.06
Canada 2.55 57.26 27.81 3.48 6.97 105.65 77.12 9.06
Totals $ 2.88 63.92 26.04 4.05 8.28 114.30 56.41 9.91
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Nine Months Ended September 30,
2009 2008
Gas Oil NGLs Total Gas Oil NGLs Total
(MMcf) (MBbls) (MBbls) (MMcfe) (MMcf) (MBbls) (MBbls) (MMcfe)
Production
volumes:
United
States 89,533 2,626 2,274 118,933 84,561 2,788 2,260 114,849
Canada 17,746 480 175 21,676 17,461 602 228 22,441
Totals 107,279 3,106 2,449 140,609 102,022 3,390 2,488 137,290
Revenues (in
thousands):
United
States $ 283,748 136,825 51,214 471,787 724,991 310,569 120,258 1,155,818
Canada 53,988 22,776 4,922 81,686 133,596 60,849 15,639 210,084
Totals $ 337,736 159,601 56,136 553,473 858,587 371,418 135,897 1,365,902
Average sales
price:
United
States $ 3.17 52.10 22.52 3.97 8.57 111.39 53.21 10.06
Canada 3.04 47.45 28.13 3.77 7.65 101.08 68.59 9.36
Totals $ 3.15 51.38 22.92 3.94 8.42 109.56 54.62 9.95
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Forest's oil and gas production decreased 9% in the third quarter 2009 to
43.8 Bcfe (476 MMcfe per day) compared to 47.9 Bcfe (520 MMcfe per day) in the
third quarter 2008. Oil and gas production decreased between the comparable
three month periods due primarily to a significant reduction in capital spending
in 2009, non-core asset sales, and normal production declines on producing oil
and gas properties. Our oil and gas production in the first nine months of 2009
increased 2% to 140.6 Bcfe (515 MMcfe per day) from 137.3 Bcfe (501 MMcfe per
day) in the first nine months of 2008. Oil and gas production increased between
the comparable nine month periods due to acquisition and drilling activity
throughout 2008, which more than offset the significant reduction in capital
spending in 2009, non-core asset sales, and normal production declines on
producing oil and gas properties.
Forest's oil and natural gas revenues decreased 63% to $177 million in the third quarter 2009 compared to $474 million in the third quarter 2008. The decrease was primarily due to a 59% decrease in the average sales price of oil and gas to $4.05 per Mcfe in the third quarter of 2009 from $9.91 per Mcfe in the third quarter of 2008. For the comparable nine month periods, oil and natural gas revenues decreased 59% to $553 million in 2009 from $1.4 billion in the same period of 2008. The decrease was due to a 60% decrease in the average sales price of oil and gas to $3.94 per Mcfe in 2009 from $9.95 per Mcfe in 2008.
The oil and natural gas revenues and average sales prices reflected in the tables above exclude the effects of commodity derivative instruments since we have elected not to designate our derivative instruments as cash flow hedges. See "Realized and Unrealized Gains and Losses on Derivative Instruments" for more information on gains and losses relating to our commodity derivative instruments.
Oil and Gas Production Expense
The table below sets forth the detail of oil and gas production expense for
the three and nine months ended September 30, 2009 and 2008.
Three Months Ended Nine Months Ended
September 30, September 30,
2009 2008 2009 2008
(In Thousands, Except Per Mcfe Data)
Production expense:
Lease operating expenses $ 34,938 44,912 114,205 120,890
Production and property taxes 10,873 23,482 34,359 67,681
Transportation and processing costs 5,352 4,874 15,918 14,440
Production expense $ 51,163 73,268 164,482 203,011
Production expense per Mcfe:
Lease operating expenses $ .80 .94 .81 .88
Production and property taxes .25 .49 .24 .49
Transportation and processing costs .12 .10 .11 .11
Production expense per Mcfe $ 1.17 1.53 1.17 1.48
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Lease operating expenses in the third quarter 2009 were $35 million, or $.80 per Mcfe, compared to $45 million, or $.94 per Mcfe, in the third quarter 2008. Lease operating expenses in the first nine months of 2009 were $114 million, or $.81 per Mcfe, compared to $121 million, or $.88 per Mcfe, in the same period of 2008. The decrease in each period was attributable to company-wide cost reduction initiatives and lower service costs.
Production and property taxes, which primarily consist of severance taxes paid on the value of the oil and gas sold, were 6.1% and 5.0% of oil and natural gas revenues for the three months ended September 30, 2009 and 2008, respectively, and 6.2% and 5.0% of oil and natural gas revenues for the nine months ended September 30, 2009 and 2008, respectively. The increase in the percentage in each 2009 period over the corresponding period in 2008 is primarily due to an increase in severance tax rates in Arkansas effective in 2009. In addition, normal fluctuations occur in the percentage between periods based upon the timing of approval of incentive tax credits in Texas and changes in the assessed values of property and equipment for purposes of ad valorem taxes.
General and Administrative Expense
The following table summarizes the components of general and administrative
expense incurred during the periods indicated.
Three Months Ended Nine Months Ended
September 30, September 30,
2009 2008 2009 2008
(In Thousands, Except Per Mcfe Data)
Stock-based compensation costs $ 8,241 7,090 21,876 22,888
Other general and administrative costs 20,512 22,744 60,661 72,973
General and administrative costs
capitalized (11,437 ) (11,788 ) (33,487 ) (38,695 )
General and administrative expense $ 17,316 18,046 49,050 57,166
General and administrative expense per
Mcfe $ .40 .38 .35 .42
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The decrease in general and administrative expense in each 2009 period compared to the corresponding period in 2008 was primarily due to decreased employee compensation costs and contract labor. The percentage of general and administrative costs capitalized remained relatively consistent between each of the periods presented, ranging from 40% to 41%.
Depreciation, Depletion, and Amortization
Depreciation, depletion, and amortization expense ("DD&A") in the third quarter 2009 was $65 million, or $1.49 per Mcfe, compared to $137 million, or $2.86 per Mcfe, in the third quarter 2008. For the nine months ended September 30, 2009, DD&A was $238 million, or $1.69 per Mcfe, compared to $379 million, or $2.76 per Mcfe, for the same period in 2008. The per-unit decrease in both periods was primarily due to a $2.4 billion non-cash ceiling test write-down recorded in the fourth quarter 2008 and a $1.6 billion non-cash ceiling test write-down recorded in the first quarter 2009.
Ceiling Test Write-Down of Oil and Gas Properties
In the first quarter 2009, we recorded a non-cash ceiling test write-down for both our United States and Canadian cost centers pursuant to the ceiling test limitation prescribed by the Securities and Exchange Commission ("SEC") for companies using the full cost method of accounting. The combined write-down totaled $1.6 billion and was primarily a result of a significant decline in natural gas prices in the first quarter of 2009. See-"Critical Accounting Policies, Estimates, Judgments and Assumptions-Full Cost Method of Accounting" and Part II, Item 1A,-"Risk Factors-Lower oil and gas prices and other factors have resulted, and in the future may result, in ceiling test write-downs and other impairments of our asset carrying values."
Interest Expense
The following table summarizes interest expense incurred during the periods
indicated.
Three Months Ended Nine Months Ended
September 30, September 30,
2009 2008 2009 2008
(In Thousands)
Interest costs $ 45,153 34,381 131,685 100,904
Interest costs capitalized (2,500 ) (3,952 ) (9,312 ) (14,639 )
Interest expense $ 42,653 30,429 122,373 86,265
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The increase in interest expense in the 2009 periods compared to the corresponding three and nine month periods in 2008 was primarily attributable to an increase in debt levels related to the acquisition of oil and gas assets from Cordillera Texas, L.P. on September 30, 2008. Interest expense also increased between the comparable three and nine month periods due to a decrease in interest costs capitalized as a result of a decrease in the amount of unproved properties under development. Interest costs related to significant unproved properties that are under development are capitalized to oil and gas properties.
Realized and Unrealized Gains and Losses on Derivative Instruments
The table below sets forth realized and unrealized gains and losses on
derivatives recognized under "Costs, expenses, and other" in our Condensed
Consolidated Statements of Operations for the periods indicated. See Note 8 and
Note 9 to the Condensed Consolidated Financial Statements for more information
on our derivative instruments.
Three Months Ended Nine Months Ended
September 30, September 30,
2009 2008 2009 2008
(In Thousands)
Realized (gains) losses on derivatives,
net:
Oil $ (299 ) 28,952 (14,596 ) 77,758
Gas (81,096 ) 19,890 (222,907 ) 32,040
Interest (3,508 ) - (6,925 ) 889
Subtotal realized (84,903 ) 48,842 (244,428 ) 110,687
Unrealized (gains) losses on derivatives,
net:
Oil (4,119 ) (142,102 ) 27,566 (3,741 )
Gas 91,976 (356,080 ) 107,906 (27,867 )
Interest (8,619 ) - (3,256 ) (4,721 )
Subtotal unrealized 79,238 (498,182 ) 132,216 (36,329 )
Realized and unrealized (gains) losses on
derivatives, net $ (5,665 ) (449,340 ) (112,212 ) 74,358
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Other, Net
The table below sets forth the components of "Other, net" within "Costs,
expenses, and other" of the Condensed Consolidated Statements of Operations for
the periods indicated.
Three Months Ended Nine Months Ended
September 30, September 30,
2009 2008 2009 2008
(In Thousands)
Unrealized foreign currency exchange
(gains) losses, net $ (9,723 ) 4,456 (15,609 ) 6,771
Unrealized losses on other investments,
net - 14,699 2,327 22,066
Rig stacking costs 4,027 - 6,679 -
Other 1,622 2,570 5,505 3,942
$ (4,074 ) 21,725 (1,098 ) 32,779
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Unrealized Foreign Currency Exchange Gains and Losses
Unrealized foreign currency exchange gains and losses in the table above relate to the outstanding intercompany indebtedness, which is denominated in U.S. dollars, between Forest Oil Corporation and our wholly-owned Canadian subsidiary.
Unrealized Losses on Other Investments
The unrealized losses on other investments in the table above relate to fair value adjustments to the shares of Pacific Energy Resources, Ltd. ("PERL") common stock and the zero coupon senior subordinated note from PERL due 2014, which were received as a portion of the total consideration for the sale of our Alaska assets in August 2007. In March 2009, PERL filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code. PERL has indicated that the value of its assets is less than the amount of its senior unsubordinated debt. Based on these facts and circumstances, we estimated the fair value of the PERL common stock and note to be zero as of September 30, 2009. See Note 8 to the Condensed Consolidated Financial Statements for more information on these investments.
Current and Deferred Income Tax
Our effective income tax rate was (1,937)% and 35% of earnings before taxes for the three months ended September 30, 2009 and 2008, respectively. For each of the nine month periods ended September 30, 2009 and 2008, our effective income tax rate was 35% of earnings before taxes. The significant change in our effective tax rate in the third quarter of 2009 as compared to the third quarter of 2008 is primarily due to a reversal of the remaining valuation allowance that was placed on our deferred tax assets in the United States during the first quarter of 2009. See Note 10 to the Condensed Consolidated Financial Statements and-"Critical Accounting Policies, Estimates, Judgments, and Assumptions-Valuation of Deferred Tax Assets" for more information on our income taxes and valuation allowance.
LIQUIDITY AND CAPITAL RESOURCES
Our exploration, development, and acquisition activities require us to make significant operating and capital expenditures. Historically, we have used cash flow from operations and our bank credit facilities as our primary sources of liquidity. To fund large and other exceptional transactions, such as acquisitions and debt refinancing transactions, we have looked to the private and public capital markets as another source of financing and, as market conditions have permitted, we have engaged in asset monetization transactions.
Changes in the market prices for oil and natural gas directly impact our level of cash flow generated from operations. Natural gas accounted for approximately 75% of our total oil and gas production for the three and nine months ended September 30, 2009 and, as a result, our operations and cash flow are more sensitive to fluctuations in the market price for natural gas than to fluctuations in the market price for oil. We employ a commodity hedging strategy as an attempt to moderate the effects of wide fluctuations in commodity prices on our cash flow. As of October 31, 2009, we had hedged, via commodity swaps and collar instruments, approximately 97 Bcfe of our total 2009 production and 69 Bcfe of our total 2010 production. This level of hedging will provide a measure of certainty of the cash flow that we will receive for a portion of our production in 2009 and 2010. However, these hedging activities are inherently risky and may result in reduced income or even financial losses to us. See Part II, Item 1A,-"Risk Factors-Our use of hedging transactions could result in financial losses or reduce our income," for further details of the risks associated with our hedging activities. In the future, we may determine to increase or decrease our hedging positions. As of October 31, 2009, all of our derivatives counterparties are commercial banks that are parties to our credit facilities, or their affiliates, with the exception of one counterparty with whom we hold three basis swaps. For further information concerning our derivative contracts, see Item 3-"Quantitative and Qualitative Disclosures About Market Risk-Commodity Price Risk" below.
The other primary source of liquidity is our U.S. credit facility and our Canadian credit facility, which had an aggregate borrowing base of $1.62 billion as of September 30, 2009. These facilities are
used to fund daily operations and to fund acquisitions and refinance debt, as needed and if available. The credit facilities are secured by a portion of our assets and mature in June 2012. We had $1.2 billion available under these facilities as of September 30, 2009. See the heading "Bank Credit Facilities" below for further details.
The public and private capital markets have served as our primary source of financing to fund large acquisitions and other exceptional transactions. In the past, we have issued debt and equity in both the public and private capital markets. For example, in February 2009, we issued $600 million principal amount of 81/2% senior notes due 2014 in a private offering and in May 2009, we issued approximately 14 million shares of common stock. Our ability to access the debt . . .
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