Denver-based Forest Oil
Forest Oil has recently floated an initial public offering for its wholly owned subsidiary, Lone Pine Resources
Recent fundamentals of Forest might not look too impressive with falling production and dipping revenues. Production in 2010 fell nearly 10% from a year ago and 13% from 2008 volumes. Given the lousy market for natural gas, that's not shocking. For the record, 75% of last year's production and 78% of total proved reserves happen to be natural gas.
However, as Foolish colleague Dan Dzombak rightly points out, it pays to invest in commodities and the companies that acquire them when they are currently trading higher than their cost of production. And this is what caught my attention regarding this company.
While current natural gas prices are at $4.27/mcf, Forest's average cost of production comes to only $1.14/mcfe. This is pretty impressive even when compared to other promising natural gas stocks. Ultra Petroleum's
Fools should also look at Forest's ability to generate future cash flows. Total present value of estimated future cash inflows from proved reserves, less future development and production costs, discounted at 10% per annum, stands at $2.7 billion as of Dec. 31, 2010. This is a 32% jump from the previous year's value, mainly because of extensions, discoveries, and revisions of previous estimates, which account for an added $593 million.
How is the stock valued?
I like to see how expensive the company is when compared to its future cash flows by looking at its total enterprise value to discounted future cash flows. This is how Forest stacks up compared to its peers:
ATP Oil & Gas
Source: Capital IQ, a Standard & Poor's company.
Forest is the cheapest stock (relatively speaking) when compared to its peers. In terms of trailing multiples, the overall market seems to have undervalued it.
Future potential to generate cash compared to the enterprise value shows why Forest could be a good buying opportunity for investors. I believe the biggest reason why is that this company has an ability to produce natural gas at a far lesser cost than its peers. When market conditions improve, expect this stock to soar.
Foolish bottom line
With a promising natural gas market and a sound business model in place, Forest Oil is looking pretty cheap. The Street does not seem to have factored in the advantages yet, but it will only be a matter of time.
Fool contributor Isac Simon does not own shares of any of the companies mentioned in this article. The Motley Fool owns shares of Range Resources and Ultra Petroleum. Motley Fool newsletter services have recommended buying shares of Range Resources. Motley Fool newsletter services have recommended writing puts in Southwestern Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.