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FST > SEC Filings for FST > Form 10-Q on 18-Aug-2014All Recent SEC Filings

Show all filings for FOREST OIL CORP

Form 10-Q for FOREST OIL CORP


18-Aug-2014

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

All expectations, forecasts, assumptions, and beliefs about our future financial results, condition, operations, strategic plans, and performance are forward-looking statements, as described in more detail under the heading "Forward-Looking Statements" below. Our actual results may differ materially because of a number of risks and uncertainties. Historical statements made herein are accurate only as of the date of filing of this Quarterly Report on Form 10-Q with the Securities and Exchange Commission ("SEC"), and may be relied upon only as of that date. The following discussion and analysis should be read in conjunction with Forest's Condensed Consolidated Financial Statements and the Notes thereto, the information included or incorporated by reference under the headings "Forward-Looking Statements" and "Risk Factors" below, and the information included or incorporated by reference in Forest's 2013 Annual Report on Form 10-K under the headings "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Unless the context indicates otherwise, all references in this document to "Forest," "the Company," "we," "our," "ours," and "us" refer to Forest Oil Corporation and its consolidated subsidiaries.

Forest is an independent oil and gas company engaged in the acquisition, exploration, development, and production of oil, natural gas, and natural gas liquids ("NGLs") primarily 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. We currently conduct our operations in one reportable geographical segment - the United States. Our core operational areas are in the Eagle Ford in South Texas and the Ark-La-Tex region in Texas, Louisiana, and Arkansas.

Recent Events

On May 5, 2014, we entered into an Agreement and Plan of Merger with Sabine Oil & Gas LLC ("Sabine"), under which Forest and Sabine will combine their businesses in an all-stock transaction. This agreement was amended on July 9, 2014 primarily to change the structure of the transaction, in which Forest now will be the surviving entity. The revised transaction structure does not change the economic terms of the transaction. Under the terms of the amended merger agreement, the owners of Sabine will contribute their interests in Sabine to Forest, in exchange for Forest common and preferred stock. Upon closing of the combination transaction, Forest's shareholders will own common shares that represent an approximate 26.5% economic interest in the combined company and approximately 20% of the total voting power, and Sabine's equity holders will own common shares and preferred shares that represent an approximate 73.5% economic interest and approximately 80% of the total voting power in the combined company. Consummation of the transaction is subject to approval by Forest shareholders, regulatory approvals, and other customary closing conditions. The combined entity will change its name to Sabine Oil & Gas Corporation and be headquartered in Houston.

In October 2013, we entered into an agreement to sell all of our oil and natural gas properties located in the Texas Panhandle for $1 billion in cash. This transaction closed in November 2013 and we have received proceeds of $985 million through June 2014, including $20 million received in May 2014, after customary purchase price adjustments and escrow account settlements. In January 2013, we entered into an agreement to sell all of our oil and natural gas properties located in South Texas, excluding our Eagle Ford oil properties, for $325 million in cash. This transaction closed in February 2013 and we received proceeds of $321 million, after customary purchase price adjustments. We used the proceeds from these property divestitures to reduce our debt. These property divestitures affect the comparability of the results of our operations between the three and six months ended June 30, 2014 and the three and six months ended June 30, 2013 presented herein.


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RESULTS OF OPERATIONS

For the three and six months ended June 30, 2014, we recognized net losses of $83 million and $104 million, respectively, compared to net earnings of $33 million and a net loss of $35 million for the three and six months ended June 30, 2013, respectively. Adjusted EBITDA, which is a measure used by management, securities analysts, and investors that consists of net earnings
(loss) before interest expense, income taxes, depreciation, depletion, and amortization, as well as other items including ceiling test write-downs and unrealized gains and losses on derivative instruments, was $31 million and $66 million for the three and six months ended June 30, 2014, respectively, compared to $88 million and $182 million for the three and six months ended June 30, 2013, respectively. The decreases in EBITDA in the 2014 periods as compared to the 2013 periods were primarily due to the property divestitures referenced above under "Recent Events." Adjusted EBITDA is a performance measure not calculated in accordance with generally accepted accounting principles ("GAAP"). See "Reconciliation of Non-GAAP Measure" at the end of this Item 2 for a reconciliation of Adjusted EBITDA to our reported net earnings (loss), the most directly comparable financial measure calculated and presented in accordance with GAAP.

Management's analysis of the individual components of the changes in our quarterly and year-to-date results follows.

Oil, Natural Gas, and Natural Gas Liquids Volumes, Revenues, and Prices

Oil, natural gas, and natural gas liquids sales volumes, revenues, and per unit
price realizations for the three and six months ended June 30, 2014 and 2013 are
set forth in the table below.

                                Three Months Ended         Six Months Ended
                                     June 30,                  June 30,
                                2014          2013         2014         2013
Sales volumes:
Oil (MBbls)                         292          601          618        1,160
Natural gas (MMcf)                6,216       11,406       12,654       25,738
NGLs (MBbls)                        182          694          360        1,392
Totals (MMcfe)                    9,060       19,176       18,522       41,050
Revenues (in thousands):
Oil                          $   28,107    $  56,316    $  58,439    $ 110,278
Natural gas                      26,545       41,161       54,716       83,819
NGLs                              5,454       19,309       11,408       40,731
Totals                       $   60,106    $ 116,786    $ 124,563    $ 234,828
Per unit price realizations:
Oil ($/Bbl)                  $    96.26    $   93.70    $   94.56    $   95.07
Natural gas ($/Mcf)                4.27         3.61         4.32         3.26
NGLs ($/Bbl)                      29.97        27.82        31.69        29.26
Totals ($/Mcfe)              $     6.63    $    6.09    $    6.73    $    5.72

We have divested a substantial amount of oil and natural gas properties in recent years, causing significant changes from period to period in our oil, natural gas, and NGL revenues and sales volumes and causing historical amounts reported to be not necessarily indicative of future results. Accordingly, the tables below distinguish oil, natural gas, and NGL sales revenues and volumes, as well as per unit price realizations, between those oil and natural gas properties that we have recently divested, i.e., South Texas and Texas Panhandle properties (the "Divested properties") and those oil and natural gas properties that we continued to own as of June 30, 2014 (the "Retained properties").


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              Oil, Natural Gas, and NGL Revenues       Oil, Natural Gas, and NGL Sales Volumes           Per Unit Price Realizations                  Change In Revenues Attributable to Change In:
               Three Months Ended                        Three Months Ended                            Three Months Ended
                    June 30,                                  June 30,                                      June 30,
               2014           2013        $ Change         2014         2013     Volume Change          2014            2013       $ Change       Volumes (1)           Prices (2)             Total
                        (In Thousands)                                                                                                                               (In Thousands)
Oil                                                                     MBbls                                       $/Bbl
Retained
properties $    28,107     $  28,545     $    (438 )          292        285                7     $    96.26         $ 100.16     $  (3.90 )   $           701       $      (1,139 )     $          (438 )
Divested
properties           -        27,771       (27,771 )            -        316             (316 )            -            87.88       (87.88 )           (27,771 )                 -               (27,771 )
           $    28,107     $  56,316     $ (28,209 )          292        601             (309 )   $    96.26         $  93.70     $   2.55     $       (28,954 )     $         745       $       (28,209 )

Natural
gas                                                                      MMcf                                       $/Mcf
Retained
properties $    26,545     $  26,998     $    (453 )        6,216      7,146             (930 )   $     4.27         $   3.78     $    .49     $        (3,514 )     $       3,061       $          (453 )
Divested
properties           -        14,163       (14,163 )            -      4,260           (4,260 )            -             3.32        (3.32 )           (14,163 )                 -               (14,163 )
           $    26,545     $  41,161     $ (14,616 )        6,216     11,406           (5,190 )   $     4.27         $   3.61     $    .66     $       (18,729 )     $       4,113       $       (14,616 )

NGLs                                                                    MBbls                                       $/Bbl
Retained
properties $     5,454     $   5,066     $     388            182        180                2     $    29.97         $  28.14     $   1.82     $            56       $         332       $           388
Divested
properties           -        14,243       (14,243 )            -        514             (514 )            -            27.71       (27.71 )           (14,243 )                 -               (14,243 )
           $     5,454     $  19,309     $ (13,855 )          182        694             (512 )   $    29.97         $  27.82     $   2.14     $       (14,245 )     $         390       $       (13,855 )

Total                                                                   MMcfe                                       $/Mcfe
Retained
properties $    60,106     $  60,609     $    (503 )        9,060      9,936             (876 )   $     6.63         $   6.10     $    .53     $        (5,344 )     $       4,841       $          (503 )
Divested
properties           -        56,177       (56,177 )            -      9,240           (9,240 )            -             6.08        (6.08 )           (56,177 )                 -               (56,177 )
           $    60,106     $ 116,786     $ (56,680 )        9,060     19,176          (10,116 )   $     6.63         $   6.09     $    .54     $       (61,609 )     $       4,929       $       (56,680 )


____________________________________________


(1) The change in revenues attributable to the change in volumes is calculated as the product of (i) the per unit price realization for the three months ended June 30, 2013 and (ii) the change in volumes between the three months ended June 30, 2013 and the three months ended June 30, 2014. Certain amounts do not foot due to rounding.

(2) The change in revenues attributable to the change in prices is calculated as the product of (i) the volumes for the three months ended June 30, 2014 and
(ii) the change in the per unit price realization between the three months ended June 30, 2013 and the three months ended June 30, 2014. Certain amounts do not foot due to rounding.

Equivalent sales volumes were 9.1 Bcfe for the three months ended June 30, 2014 as compared to 19.2 Bcfe for the three months ended June 30, 2013. The 10.1 Bcfe, or 53%, decrease in equivalent sales volumes for the three months ended June 30, 2014 compared to the three months ended June 30, 2013 was primarily due to the divestitures of producing oil and natural gas properties in the Texas Panhandle, which accounted for 9.2 Bcfe of the decrease. Equivalent sales volumes attributable to properties we continued to own as of June 30, 2014 decreased 9% to 9.1 Bcfe for the three months ended June 30, 2014 from 9.9 Bcfe for the three months ended June 30, 2013. The 9% decrease in these equivalent sales volumes was due to a 13% decrease in natural gas production partially offset by a 2% increase in oil production and a 1% increase in NGL production. The increase in oil production was a result of our development efforts in the Eagle Ford, where we incurred approximately $16 million in direct exploration, development, and leasehold acquisition capital expenditures during the three months ended June 30, 2014 and the increase in NGL production was due to our drilling program in East Texas, where we incurred approximately $34


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million in direct exploration, development, and leasehold acquisition capital expenditures during the three months ended June 30, 2014. Natural gas production declined 13% due to the natural decline in production from existing wells that exceeded the incremental natural gas production we added during the three months ended June 30, 2014 from drilling liquids-rich East Texas wells.

Revenues from oil, natural gas, and NGLs were $60 million in the second quarter of 2014 as compared to $117 million in the second quarter of 2013. The $57 million, or 49%, decrease in revenues in the second quarter of 2014 compared to the second quarter of 2013 was primarily due to the divestitures of producing oil and natural gas properties in the Texas Panhandle, which accounted for $56 million of the decrease. Revenues from the properties we continued to own as of June 30, 2014 decreased by $1 million primarily due to decreased natural gas production and per unit price realizations for oil, partially offset by increased natural gas and NGL per unit price realizations and oil production between the two periods.

                                                                                                                                                             Change In Revenues Attributable
                   Oil, Natural Gas, and NGL Revenues           Oil, Natural Gas, and NGL Sales Volumes           Per Unit Price Realizations                         to Change In:
                       Six Months                                                                                   Six Months
                          Ended                                    Six Months Ended                                    Ended
                        June 30,                                       June 30,                                      June 30,                                             Prices
                   2014              2013         $ Change         2014          2013     Volume Change          2014            2013       $ Change     Volumes (1)       (2)          Total
                             (In Thousands)                                                                                                                          (In Thousands)
Oil                                                                              MBbls                                       $/Bbl
Retained
properties  $     58,439          $  55,770     $    2,669             618        547               71     $    94.56         $ 101.96     $  (7.39 )   $     7,239     $ (4,570 )   $    2,669
Divested
properties             -             54,508        (54,508 )             -        613             (613 )            -            88.92       (88.92 )       (54,508 )          -        (54,508 )
            $     58,439          $ 110,278     $  (51,839 )           618      1,160             (542 )   $    94.56         $  95.07     $   (.51 )   $   (51,526 )   $   (313 )   $  (51,839 )

Natural gas                                                                      MMcf                                        $/Mcf
Retained
properties  $     54,716          $  50,886     $    3,830          12,654     14,812           (2,158 )   $     4.32         $   3.44     $    .89     $    (7,414 )   $ 11,244     $    3,830
Divested
properties             -             32,933        (32,933 )             -     10,926          (10,926 )            -             3.01        (3.01 )       (32,933 )          -        (32,933 )
            $     54,716          $  83,819     $  (29,103 )        12,654     25,738          (13,084 )   $     4.32         $   3.26     $   1.07     $   (42,610 )   $ 13,507     $  (29,103 )

NGLs                                                                             MBbls                                       $/Bbl
Retained
properties  $     11,408          $  10,665     $      743             360        354                6     $    31.69         $  30.13     $   1.56     $       181     $    562     $      743
Divested
properties             -             30,066        (30,066 )             -      1,038           (1,038 )            -            28.97       (28.97 )       (30,066 )          -        (30,066 )
            $     11,408          $  40,731     $  (29,323 )           360      1,392           (1,032 )   $    31.69         $  29.26     $   2.43     $   (30,197 )   $    874     $  (29,323 )

Total                                                                            MMcfe                                       $/Mcfe
Retained
properties  $    124,563          $ 117,321     $    7,242          18,522     20,218           (1,696 )   $     6.73         $   5.80     $    .92     $    (9,842 )   $ 17,084     $    7,242
Divested
properties             -            117,507       (117,507 )             -     20,832          (20,832 )            -             5.64        (5.64 )      (117,507 )          -       (117,507 )
            $    124,563          $ 234,828     $ (110,265 )        18,522     41,050          (22,528 )   $     6.73         $   5.72     $   1.00     $  (128,872 )   $ 18,607     $ (110,265 )


____________________________________________


(1) The change in revenues attributable to the change in volumes is calculated as the product of (i) the per unit price realization for the six months ended June 30, 2013 and (ii) the change in volumes between the six months ended June 30, 2013 and the six months ended June 30, 2014. Certain amounts do not foot due to rounding.


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(2) The change in revenues attributable to the change in prices is calculated as the product of (i) the volumes for the six months ended June 30, 2014 and
(ii) the change in the per unit price realization between the six months ended June 30, 2013 and the six months ended June 30, 2014. Certain amounts do not foot due to rounding.

Equivalent sales volumes were 18.5 Bcfe for the six months ended June 30, 2014 compared to 41.1 Bcfe for the six months ended June 30, 2013. The 22.5 Bcfe, or 55%, decrease in equivalent sales volumes for the six months ended June 30, 2014 compared to the six months ended June 30, 2013 was primarily due to the divestitures of producing oil and natural gas properties in South Texas and the Texas Panhandle, which accounted for 20.8 Bcfe of the decrease. Equivalent sales volumes attributable to properties we continued to own as of June 30, 2014 decreased 8% to 18.5 Bcfe for the six months ended June 30, 2014 from 20.2 Bcfe for the six months ended June 30, 2013. The 8% decrease in these equivalent sales volumes was due to a 15% decrease in natural gas production partially offset by a 13% increase in oil production and a 2% increase in NGL production. The increase in oil production was a result of our development efforts in the Eagle Ford, where we incurred approximately $38 million in direct exploration, development, and leasehold acquisition capital expenditures in the six months ended June 30, 2014 and the increase in NGL production was due to our drilling program in East Texas, where we incurred approximately $57 million in direct exploration, development, and leasehold acquisition capital expenditures in the six months ended June 30, 2014. Natural gas production declined 15% due to the natural decline in production from existing wells that exceeded the incremental natural gas production we added during the six months ended June 30, 2014 from drilling liquids-rich East Texas wells.

Revenues from oil, natural gas, and NGLs were $125 million in the first six months of 2014 compared to $235 million in the first six months of 2013. The $110 million, or 47%, decrease in the first six months of 2014 compared to the first six months of 2013 was primarily due to the divestitures of producing oil and natural gas properties in South Texas and the Texas Panhandle, which accounted for $118 million of the decrease. Revenues from the properties we continued to own as of June 30, 2014 increased by $7 million, primarily due to increased natural gas and NGL per unit price realizations and oil and NGL production, partially offset by decreased natural gas production and oil per unit price realizations between the two periods.

The revenues and per unit price realizations reflected in the tables above exclude the effects of commodity derivative instruments because we have elected not to designate our derivative instruments as cash flow hedges. See "Realized and Unrealized Gains and Losses on Derivative Instruments" below for more information on gains and losses relating to our commodity derivative instruments.

Production Expense

The table below sets forth the detail of production expense for the periods
indicated.

                                       Three Months Ended          Six Months Ended
                                            June 30,                   June 30,
                                        2014          2013         2014        2013
                                           (In Thousands, Except Per Mcfe Data)
Production expense:
Lease operating expenses            $     14,295    $ 19,167    $  28,805    $ 40,371
Production and property taxes              2,740       5,029        5,965       7,245
Transportation and processing costs        2,379       3,098        4,894       6,378
Production expense                  $     19,414    $ 27,294    $  39,664    $ 53,994
Production expense per Mcfe:
Lease operating expenses            $       1.58    $   1.00    $    1.56    $    .98
Production and property taxes                .30         .26          .32         .18
Transportation and processing costs          .26         .16          .26         .16
Production expense per Mcfe         $       2.14    $   1.42    $    2.14    $   1.32


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We have divested a substantial amount of oil and natural gas properties in recent years, causing significant changes from period to period in our lease operating expenses, production and property taxes, and transportation and processing costs and causing historical amounts reported to be not necessarily indicative of future results. Accordingly, the tables below distinguish lease operating expenses, production and property taxes, and transportation and processing costs, as well as per unit production expense, between those oil and natural gas properties we have recently divested, i.e., the South Texas and Texas Panhandle properties (the "Divested properties") and those oil and natural gas properties that we continued to own as of June 30, 2014 (the "Retained properties").

                                              Production Expense                   Production Expense per Mcfe
                                        Three Months Ended                      Three Months Ended
                                             June 30,                                June 30,
                                        2014           2013       $ Change       2014         2013       $ Change
Lease operating expenses                        (In Thousands)                               $/Mcfe
Retained properties                 $    14,295     $ 12,433     $  1,862     $    1.58     $  1.25     $     .33
Divested properties                           -        6,734       (6,734 )           -         .73          (.73 )
                                    $    14,295     $ 19,167     $ (4,872 )   $    1.58     $  1.00     $     .58
Production and property taxes
Retained properties                 $     2,740     $  2,139     $    601     $     .30     $   .22     $     .08
Divested properties                           -        2,890       (2,890 )           -         .31          (.31 )
                                    $     2,740     $  5,029     $ (2,289 )   $     .30     $   .26     $     .04
Transportation and processing costs
Retained properties                 $     2,379     $  3,013     $   (634 )   $     .26     $   .30     $    (.04 )
Divested properties                           -           85          (85 )           -         .01          (.01 )
                                    $     2,379     $  3,098     $   (719 )   $     .26     $   .16     $     .10
Total
Retained properties                 $    19,414     $ 17,585     $  1,829     $    2.14     $  1.77     $     .37
Divested properties                           -        9,709       (9,709 )           -        1.05         (1.05 )
                                    $    19,414     $ 27,294     $ (7,880 )   $    2.14     $  1.42     $     .72


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                                              Production Expense                  Production Expense per Mcfe
                                        Six Months Ended                        Six Months Ended
                                            June 30,                                June 30,
                                       2014          2013       $ Change        2014         2013       $ Change
Lease operating expenses                        (In Thousands)                              $/Mcfe
Retained properties                 $  28,805     $ 23,121     $   5,684     $    1.56     $  1.14     $     .42
Divested properties                         -       17,250       (17,250 )           -         .83          (.83 )
                                    $  28,805     $ 40,371     $ (11,566 )   $    1.56     $   .98     $     .58
Production and property taxes
Retained properties                 $   5,965     $  4,665     $   1,300     $     .32     $   .23     $     .09
Divested properties                         -        2,580        (2,580 )           -         .12          (.12 )
                                    $   5,965     $  7,245     $  (1,280 )   $     .32     $   .18     $     .14
. . .
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