No noticeable improvement in leverage metrics in Forest Oil asset deal

Denver, CO-based Forest Oil Corp. has agreed to sell all of its properties located in South Louisiana for approximately $220 million.

The properties produced 20 MMcfe/d (65% liquids) during the third quarter of 2012 and had estimated proved reserves of 45 Bcfe (62% liquids) as of December 31, 2011. In a note to investors Friday, Jefferies & Co. Inc. broke down the product mix as 58% oil, 3% NGL, 39% gas and estimated proved reserves of 45 bcfe as of yearend 2012.

The transaction implies a price per flowing mcfe of $11,000, short of the $15,000 or above price per mcfe that analysts at Jefferies expected with a near 60% oil cut. While the South Louisiana assets sold at a seemingly low price on a per flowing mcfe metric, the analysts noted that the deal “looks fairly priced on a dollar per reserves basis” at $4.90/mcfe.

In a prepared statement, Forest noted its intention to use the divestiture’s proceeds to repay outstanding borrowings under its bank credit facility, but Jefferies analysts had questions about the rationale of the transaction, noting that they did not see a sustained improvement in debt metrics.

“We had previously modeled net debt / EBITDAX of 4.5x at ye2013, based on rather conservative production growth assumptions. In any case, after modeling in the transaction, we do not see a noticeable move in the metric. In fact, we see it inching up to 4.7x,” the analysts noted.

“One potential benefit is that the transaction should improve the overall decline of the remaining base assets and thus make it easier to show 'organic' growth going forward,” the analysts offered.

Since embarking on its deleveraging plan in early July, Forest has completed or has under contract, transactions totaling approximately $277 million. This includes the previously announced East Texas natural gas gathering assets for $34 million, approximately 5,600 net acres in the Eagle Ford Shale for $15 million, and other miscellaneous properties for $8 million.

Upon closing of the South Louisiana transaction, Forest intends to update 2012 guidance.

The transaction is expected to close on November 16, 2012, with an effective date of August 1, 2012.

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