The first look
Forest had a strong quarter because of a 17% increase in production volume, compared to the second quarter of 2005. (The company reported results comparing this year's quarter to the results for the onshore segment of the business in 2005, excluding the Mariner spinoff from comparable numbers and making year-over-year comparisons relevant.) Increased production led to a healthy 35% increase in revenue and 26% increase in earnings per share. Natural gas prices (roughly 70% of Forest's production) were essentially flat compared to 2005, but oil prices (30% of production) rose 43% to $63.12 per barrel.
Better yet, the company is fighting against service cost increases within the oil patch. It has established a wholly owned subsidiary called Lantern Drilling to develop much of its properties. Lantern has 10 rigs, designed for the geological structures that Forest is developing. As a result of bringing some drilling activities in house and other measures, the company estimates that its total cash production costs for 2006 will be $2.69/Mcfe (thousand cubic feet equivalent), compared to $2.77/Mcfe in 2005. (Total cost includes lease operating, general and administrative, and interest and tax expenses).
The company estimates a 14% increase in average production rate for the full year of 2006 and continued increases into the future. Through acquisitions, partnerships, and the Mariner spinoff, the company has aggregated several attractive drilling opportunities. Management lists 12 growth areas, with 10 currently being developed. Because of drilling success year to date, the company has increased its capital spending projection to develop several good drilling prospects.
Is the price right?
By several of the standard measures used to value companies in the oil patch, Forest trades at a modest discount to many of its peers. Take a look at management's corporate update (link opens a .pdf file) from April for the details. My numbers comparing Forest to peers such as Houston Exploration
Of course, success with any investment in the oil patch is going to be closely tied to the future of oil and gas prices. If you believe high oil and gas prices are here to stay, Forest may be worth some additional research. The company is demonstrating strong production growth and has an excellent inventory of drilling prospects to drive growth well into the future. If the company continues to execute, the modest discount today may turn into a premium tomorrow.
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