Forest Oil could see $1B from Texas Panhandle divestiture

After receiving unsolicited proposals from third parties, Forest Oil Corp. (NYSE:FST) will pursue the sale of all of its Texas Panhandle assets. Forest has retained JP Morgan Securities LLC to assist in the marketing efforts. Forest intends to use any proceeds from a potential sale to reduce debt and enhance financial flexibility.

Patrick R. McDonald, president and CEO commented, “Over the last several years, drilling and completion efforts by Forest and other companies have delineated substantial oil, natural gas and natural gas liquids resources in the Texas Panhandle. Our significant acreage position, which is largely operated by Forest and held by production, presents a large-scale, low-risk development opportunity. If completed, the sale of the Texas Panhandle assets should allow us to reduce meaningfully our indebtedness and enhance our financial flexibility and ability to accelerate development of our assets. Upon successful completion of a transaction, Forest’s remaining asset portfolio will be anchored by its ongoing oil development opportunity in the Eagle Ford Shale, where oil production is projected to more than double during 2014. In addition, the company has a position of 111,000 net acres in East Texas which is largely held by production and upon which the company plans to continue the development of its oil and natural gas liquids properties. The company also intends to maintain its exposure to potential natural gas development through its low-decline natural gas properties in the Ark-La-Tex region.”

In a research note following the announcement, Stifel analysts pointed to recent asset sales in the Anadarko Basin/Panhandle area, estimating a potential valuation range of $1.0-$1.2 billion.

“Recent asset sales in the Anadarko Basin/Panhandle area have averaged $77,000/boe/d ($61,000/boe/d excluding the APA/Cordillera deal) and we believe that $60,000-$70,000 per flowing barrel of production is a reasonable range, resulting in a potential valuation range of $1.0-1.2 billion.”

"This would be a meaningful transaction given that the asset accounts for just under half of the current production and the valuation is very sensitive to the sales proceeds given the market cap ($0.55 billion), debt level ($1.7 billion), and expected proceed level ($1.0-1.2 billion). At $1.0 billion, the debt/2014 EBITDA drops from 3.7x to 2.6x and the EV/EBITDA multiple remains at 5.1x. At $1.2 billion, the debt/2014 EBITDA drops to 1.9x and the EV/EBITDA multiple improves to 4.4x," they noted.

The keys to the potential transaction are, according to the analysts, “the meaningful reduction in debt, potential for improved EV/EBITDA valuation (at $70,000/boe/d), and the potential for bids to come in above our high end range given the multi-zone opportunities in the region and some outlier comps. The key negative is the reduced unrisked/risked NAV upside given that the company will most likely be selling all zones in the transaction and getting out of the region completely.”

“Bottom line, we continue to like this name as a turnaround and this anticipated transaction helps the turnaround happen at a faster pace, but at the expense of reducing some of the NAV upside,” the analysts said.

Denver, CO-based Forest Oil Since began its deleveraging plan in early July 2012 and closed on the sale of South Texas properties (excluding its Eagle Ford Shale oil properties) in February 2013 for net cash proceeds of approximately $307 million.

 

Did You Like this Article? Get All the Energy Industry News Delivered to Your Inbox

Subscribe to an email newsletter today at no cost and receive the latest news and information.

 Subscribe Now

Whitepapers

Maximizing Operational Excellence

In a recent survey conducted by PennEnergy Research, 70% of surveyed energy industry professional...

Leveraging the Power of Information in the Energy Industry

Information Governance is about more than compliance. It’s about using your information to drive ...

Reduce Engineering Project Complexity

Engineering document management presents unique and complex challenges. A solution based in Enter...

Revolutionizing Asset Management in the Electric Power Industry

With the arrival of the Industrial Internet of Things, data is growing and becoming more accessib...