Is Forest Oil Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Forest Oil (NYSE: FST) fit the bill? Let's take a look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell Forest's story, and we'll be grading the quality of that story in several ways:

• Growth: are profits, margins, and free cash flow all increasing?
• Valuation: is share price growing in line with earnings per share?
• Opportunities: is return on equity increasing while debt to equity declines?
• Dividends: are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's take a look at Forest's key statistics:

FST Total Return Price data by YCharts

Source: YCharts. * Period begins at end of Q2 2010.

FST Return on Equity data by YCharts

Source: YCharts. * Period begins at end of Q2 2010.

How we got here and where we're going
Forest seems to be drilling a dry hole for investors --it's mustered only one out of seven possible passing grades, and that was granted more on a technicality than for genuine improvement. Forest's collapse into negative-equity territory has been ruinous for shareholders, who have lost more than half their investment as the company's fundamentals have all plummeted. In theory, things can't possibly get much worse, but the harsh reality is that Forest's fall might not be over yet if it fails to right this ship quickly. Is there any hope left? Let's take a closer look.

Over the past few quarters, increasing domestic oil and natural gas production has strengthened the United States' energy position in global markets. However, oil and gas producers are saddled with heavy capital expenditures from their efforts to drive this multiyear boom, which has hindered them from carrying out new drilling activities. The moderating costs of oil and natural gas have also had deleterious effects on many smaller producers' profitability, as you can see in the charts above. As a result, Forest has been divesting itself of some North American properties to reduce its debt exposure and enhance financial flexibility.

Forest recently announced the sale of its oil and natural gas fields in the Texas Panhandle, after receiving unsolicited offers. Robert W. Baird & Co. analyst Maggie Savage notes that the assets include about 100,000 acres of mineral rights, half natural gas and half natural gas liquids, and the proceeds from the transaction might fetch up to $1 billion. The company's also signed a definitive agreement with an undisclosed buyer to sell some of its properties in the Permian Basin , which may generate proceeds of about $35 million. CEO Patrick R. McDonald states that the proceeds from these transactions will be used to cut Forest Oil's outstanding borrowings under its bank credit facility. Earlier this year, Forest also divested its oil and natural gas assets in Southern Texas for net proceeds of $307 million.

Forest is not in complete fire-sale mode, though -- it's also ramped up its exploration activities in the Eagle Ford shale. The company has entered into a strategic partnership with oilfield services giant Schlumberger (SLB -0.17%) to develop approximately 86,000 acres of Eagle Ford land in South Texas. Schlumberger will contribute $90 million for a 50% stake in Forest's Eagle Ford position.

Putting the pieces together
Today, Forest Oil has few of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.