Forest Oil Corporation's Strategy Proves Faulty

Last year, Forest Oil (NYSE: FST  ) was very active on the asset sale front. The company decided to reduce its indebtedness and sold assets for a total of $1.3 billion. As a result, Forest Oil retained its Eagle Ford assets, where it expects to hold through production 24,500 net acres. In addition, the company holds 162,000 net acres in the greater Ark-La-Tex region, which includes East Texas, North Louisiana, and the Arkoma Basin. The disappointing results from wells drilled in the Eagle Ford questioned the viability of the company's strategy and put its share price under additional pressure.

Growth in Eagle Ford under question
Frustrating results from fourth-quarter drilling in the Eagle Ford area forced Forest Oil to defer its drilling activity in the region. The company stated that it would take its time to process the results and would not be active on the drilling front in the first half of the year.

Forest Oil plans to spend $300 million on capital expenditures in 2014, with 64% of this money going to Ark-La-Tex and 36% going to Eagle Ford. Back in the third quarter of 2013, the company expected Eagle Ford production to come closer to 6,000 barrels of oil equivalent per day (boe/d). In the fourth quarter, net sales from Eagle Ford averaged 2,950 boe/d. Taking into account the recent well results and the postponement of its activity in the area, this target will not be reached.

Eagle Ford assets do not always bring great results for their holders. Swift Energy (NYSE: SFY  ) found itself under pressure after it reported that its liquid yields from wells in the area underperformed. Natural gas prices are returning to their previous levels following the big spike caused by the harsh winter, so the focus on liquids production remains key for operators.

Another producer, EXCO Resources (NYSE: XCO  ) , acquired Eagle Ford properties for $685 million in July 2013. As a result, the company's debt rose to $1.86 billion, which is way too much for a company that had $634 million in revenues in 2013. These properties must deliver stellar results to justify the move, but this hasn't happened so far, and EXCO shares remain under pressure.

Debt remains high
Despite the fact that Forest Oil used proceeds from the asset sales to lower its debt, the company still owes $800 million. Forest Oil stated that it expects to outspend its cash flow in terms of capital expenditures this year. The company finished 2013 with $66 million of cash on the balance sheet, so it has a little bit of a safety cushion.

However, it is difficult to project where the growth will come from given the latest well results. In addition, the company has no more assets to sell, and stated that there were no plans to do so. There is a possibility that bigger companies could become interested in Forest Oil given its very depressed share price. However, as the asset quality is now under question, this remains just a possibility.

Forest Oil's future is uncertain. A lot will depend on the company's moves after it processes the results of its Eagle Ford findings in the first half of this year. It is difficult to expect major positive news for Forest Oil shareholders prior to summer, and the share price could remain under pressure until then.

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