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Forest Oil Corp. Reports Operating Results (10-Q)

November 03, 2010 | About:
10qk

10qk

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Forest Oil Corp. (FST) filed Quarterly Report for the period ended 2010-09-30.

Forest Oil Corp. has a market cap of $3.59 billion; its shares were traded at around $31.59 with a P/E ratio of 16.8 and P/S ratio of 4.7. FST is in the portfolios of Westport Asset Management, David Dreman of Dreman Value Management, Richard Aster Jr of Meridian Fund, John Buckingham of Al Frank Asset Management, Inc., Diamond Hill Capital of Diamond Hill Capital Management Inc, Eric Mindich of Eton Park Capital Management, L.P., HOTCHKIS & WILEY of HOTCHKIS & WILEY Capital Management LLC, Manning & Napier Advisors, Inc, Kenneth Fisher of Fisher Asset Management, LLC, Steven Cohen of SAC Capital Advisors.

Highlight of Business Operations:

Oil and gas production decreased 4% to 457 MMcfe per day in the third quarter of 2010 as compared to 476 MMcfe per day in the third quarter of 2009. The decrease was due to the sale of approximately $1 billion of non-core oil and gas properties since the third quarter of 2009 representing 72 MMcfe of oil and gas production per day. The loss of the production associated with these property sales since the third quarter of last year was substantially offset by production increases from ongoing drilling operations in our core development areas. Oil and gas production also decreased 13% in the first nine months of 2010 as compared to the first nine months of 2009 primarily due to the asset sales discussed above, offset by production increases from ongoing drilling operations in our core areas. Oil and gas sales increased 19% in the third quarter of 2010 to $210 million from $177 million in the corresponding period in 2009 and 16% in the first nine months of 2010 to $640 million from $553 million in the corresponding period in 2009. The increase in each period was due to increases in the average realized oil and gas prices. Lease operating expenses were 10% lower on a per-unit basis in the third quarter of 2010 as compared to the third quarter of 2009 and were 11% lower on a per-unit basis in the first nine months of 2010 as compared to the same period in 2009. The decrease in each period was attributable to cost reduction initiatives and the sale of non-core oil and gas properties in late 2009 that had higher per-unit operating costs as compared to the properties we retained. 28

Forest reported net earnings of $69 million in the third quarter of 2010, or $.60 per diluted share, compared to net earnings of $172 million, or $1.53 per diluted share, in the third quarter 2009. The decrease in net earnings in the third quarter 2010 compared to the third quarter 2009 was primarily due to a $164 million reduction of a valuation allowance on a portion of our deferred tax assets during the third quarter 2009. Earnings before income taxes increased $98 million between the two quarterly periods due to increased commodity prices and an increase in net realized and unrealized gains on commodity derivative instruments. Forest reported net earnings of $211 million in the first nine months of 2010, or $1.86 per diluted share, compared to a net loss of $968 million, or $9.46 per diluted share, in the first nine months of 2009. The increase in net earnings in the first nine months of 2010 is primarily due to a $1.6 billion non-cash ceiling test write-down recorded in the first quarter 2009, which was caused by the significant decline in spot natural gas prices at March 31, 2009, as well as due to increased commodity prices and an increase in net realized and unrealized gains on commodity derivative instruments.

Forest's earnings before interest expense; income taxes; depletion, depreciation, and amortization expense; and certain other items ("Adjusted EBITDA"), were $176 million and $193 million for the quarters ended September 30, 2010 and 2009, respectively, and were $528 million and $586 million for the first nine months of 2010 and 2009, respectively. The decrease in Adjusted EBITDA in the 2010 periods as compared to the 2009 periods is primarily driven by decreases in realized gains on derivative instruments somewhat offset by increases in revenues and lower production expense, each as discussed below. Adjusted EBITDA is not considered a performance measure under U.S. Generally Accepted Accounting Principles ("GAAP") and reference should be made to "Reconciliation of Non-GAAP Measures" at the end of this Item 2 for further explanation of this performance measure, as well as a reconciliation to the most directly comparable GAAP measure. Discussion of the components of the changes in our quarterly and year-to-date results follows.

Lease operating expenses in the third quarter 2010 were $30 million, or $.72 per Mcfe, compared to $35 million, or $.80 per Mcfe, in the third quarter 2009. Lease operating expenses in the first nine months of 2010 were $88 million, or $.72 per Mcfe, compared to $114 million, or $.81 per Mcfe, in the first nine months of 2009. The $5 million and $27 million decrease in lease operating expense between the comparable three and nine month periods, respectively, was primarily due to the non-core oil and gas property divestitures that occurred during late 2009. Lease operating expenses on a per-Mcfe basis also decreased between the periods presented due to cost reduction initiatives and the sale of non-core oil and gas properties in late 2009 that had higher average per-unit operating costs as compared to the properties we retained.

Transportation and processing costs in the third quarter 2010 were $6 million, or $.15 per Mcfe, compared to $5 million, or $.12 per Mcfe, in the third quarter 2009. Transportation and processing costs in the first nine months of 2010 were $17 million, or $.14 per Mcfe, compared to $16 million, or $.11 per Mcfe, in the first nine months of 2009. Transportation and processing costs increased between comparable periods primarily due to higher transportation costs in Canada.

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