Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Forest Oil Corporation's Strategy Proves Faulty

Don't let it get away!

Keep track of the stocks that matter to you.

Help yourself with the Fool's FREE and easy new watchlist service today.

Last year, Forest Oil (NASDAQOTH: SOGC  ) 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.

A safer play for energy investors
Imagine a company that rents a very specific and valuable piece of machinery for $41,000... per hour (that's almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company's can't-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report reveals the company we're calling OPEC's Worst Nightmare. Just click HERE to uncover the name of this industry-leading stock... and join Buffett in his quest for a veritable LANDSLIDE of profits!


Read/Post Comments (0) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2862632, ~/Articles/ArticleHandler.aspx, 9/4/2015 12:19:17 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Vladimir Zernov

Vladimir Zernov believes that fundamental analysis works best with energy and materials stocks and covers them on Motley Fool.

Today's Market

updated 3 hours ago Sponsored by:
DOW 16,374.76 23.38 0.14%
S&P 500 1,951.13 2.27 0.12%
NASD 4,733.50 -16.48 -0.35%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/3/2015 4:01 PM
SFY $0.60 Up +0.02 +3.09%
Swift Energy Compa… CAPS Rating: **
SOGC $0.00 Down +0.00 +0.00%
Sabine Oil & Gas CAPS Rating: ***
XCO $0.96 Down -0.03 -3.04%
EXCO Resources, In… CAPS Rating: ***