The legendary humorist Will Rogers once defined insanity as doing the same thing repeatedly and each time expecting different results. H. Craig Clark, president and chief executive officer of Denver-based Forest Oil Corp. (NYSE: FST), shares Rogers' sagacity. That's why, upon taking the reins of the firm on August 1, 2003, he embarked upon a new strategy aimed at achieving a reversal of the company's then-lackluster financial and operating fortunes. "At the time, we had a predominance of high-risk, capital-intensive, frontier exploration activities in as many as 15 countries," he says. "We were also mainly an offshore producer with short-life reserves. This strategy wasn't working and it manifested itself in our share price." At the time, shares of Forest were at about $22. The challenges: create a balanced asset portfolio-one that provides for the development and exploitation of proven reserves with plenty of productive upside in well-understood areas closer to home, bring balance and discipline to Forest's spending mix and pay down debt which had gotten as high as 46% of book capitalization at the start of 2003. A diehard Texas A&M alumnus and football fan, Clark and the rest of his team went about tackling these challenges with a four-point game plan. Among the early defensive and offensive plays: lower costs, delever and create a more flexible balance sheet, limit frontier exploration spending and reallocate capital to more conventional North American plays-including exploration prospects-onshore the Gulf Coast, in the western U.S. and in Alberta. Methodically, the company has steadily gained ground. Since the summer of 2003, it has reduced G&A expenses from 26 cents per thousand cubic feet equivalent to 19 cents-a record low. Also, the turnaround operator adopted a free-cash-flow model. "We don't spend all our cash flow-in fact, we've been cutting back our annual capital spending on exploration and development since 2003," says David H. Keyte, Forest Oil executive vice president and chief financial officer. "Concurrently, we've been asking each of our business units to generate free cash flow back to us which can then be used to deleverage the balance sheet and to make acquisitions-which now compete for capital-rather than borrow money for acquisitions." In its Gulf of Mexico business segment, the company in first-quarter 2005 spent only 27% of the cash flow this segment generated during that period-the other 70%-plus went toward acquisitions and debt repayments. A former Apache executive, Clark notes that compared with 18 other top independents, the company in 2004 generated the highest percent of free cash flow-12.2%-relative to market cap. Keyte emphasizes that it is essential that a balance sheet be flexible because it has to be able to take a pretty big hit-perhaps hundreds of millions of dollars-at any point in time to ensure that a company can execute effectively on an acquisition opportunity. With its balance-sheet leverage pruned from 43% of book capitalization in August 2003 to 33% at the end of March 2005, it's not surprising that Forest has been able to grow its North American portfolio of development, exploitation and exploration assets through acquisitions. In fact, since August 2003, the operator has made more than $1 billion worth of North American acquisitions, which now account for 43% of its total assets. This includes the $224-million purchase of Gulf of Mexico assets from Unocal in late 2003, the $330-million buy of Wiser Oil Co. in June 2004-which included that company's Gulf Coast and Alberta assets-and the $235-million purchase this April of the Buffalo Wallow Field in the Texas Panhandle-a crown-jewel asset with more than 300 drillable locations. Within the past two years, Forest's shift in strategy has resulted in a 26% increase in production, to 502 million cubic feet equivalent per day; a 34% increase in reserves, to 1.45 trillion cubic feet equivalent; the addition of 750,000 net acres in non-frontier areas; the identification of more than 2,800 new drilling projects companywide; and a doubling of its stock price to a recent high of $45.68. Meanwhile, reliance on short-lived Gulf of Mexico reserves has been reduced to 24% of the company's overall asset mix and its international holdings, not yet booked, have been whittled down to three areas: Gabon, South Africa and Italy. Even the company's assets in Alaska, where its level of offshore Cook Inlet oil output hasn't met Street expectations, now look promising. In 2003, Forest reclassified its proved reserves there by 86%. "While we have 50,000 acres offshore in Cook Inlet, we also have 1 million acres onshore in the region," Keyte points out. "What's notable is that we've already had success with our onshore, non-frontier gas exploration drilling program there, hooking up the first 5 million cubic feet per day of gas production in first-quarter 2005." Notable, too, is another leg of Forest's four-point game plan: providing incentives for all its employees-not just the folks in the boardroom. "Everybody from the pumper in the field on up is empowered through stock options and achievement bonuses to meet their business unit's targets," says Clark. With a capex budget of $425- to $475 million for 2005-and 30% to 40% of its production hedged to lock in the economics of its acquisitions-the company this year plans to spend equal thirds of its budget on exploration, exploiting existing properties and acquisitions. "The key word is balance," says Clark. "I'm not going to get into a situation of spending on any one activity to the point where it dominates our company's focus." Self-effacing in nature, Clark makes the point that he's not a one-man show. "I want to be judged on how well our people have done, how well our assets and strategy have performed, how far the company has come in the past two years-and our current stock price." Adds Keyte, "The Street views Forest Oil today as a good steward of capital and as a safe play because of our free-cash-flow model. We, of course, still await the day when the stock trades at a premium [to net asset value]. But that takes time, and while we've improved greatly, we're not that far along yet." David R. Tameron, senior E&P analyst for Jefferies & Co. in Denver, agrees Clark has brought renewed operational focus and capital discipline to Forest, transforming the company's assets and more importantly, the company's culture. "Divisions are allocated capital, not necessarily based on size, geography or asset, but rather based on success and rates of return," he says. "We're forecasting 2005 cash costs to remain relatively flat on a year-over-year basis, in stark contrast to industry norms." Meanwhile, the analyst estimates the company is generating $30 million per month in free cash flow, which should help further reduce net debt. Tameron contends that investors focusing on "organic" growth are overlooking that a key part of Forest's business strategy is growth through its current portfolio and acquisitions. The analyst also believes the shares of Forest Oil trade at a significant discount to the company's peer group based on multiples of 4.5 times estimated 2006 price/discounted cash flow and 5.5 times estimated 2006 enterprise value/EBITDAX (earnings before interest, taxes, depreciation, amortization and exploration expenses). Says Tameron, "The shares should trade closer in line with the group, and our $51 share-price target is based on a multiple of five times our 2006 price/discounted cash-flow estimate."

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