Forest Oil Gets $1 Billion For Texas Assets, Sacrifices Half Of Its Reserves
Bought Texas Panhandle area oil and gas assets with estimated proved reserves of 517 billion cubic feet equivalent (Bcfe) as of Dec. 31, 2012.
Forest Oil Corp. (NYSE: FST)’s $1 billion deal to sell its Texas Panhandle area oil and gas assets beat skeptics expectations on price -- or that a deal could be done at all.
David Tameron, senior analyst for Wells Fargo Securities, said the Oct. 3 announcement gave Forest a “good headline number, in our view, as we believe the Street was around the $900-950 million mark.
“So a positive both on the price and execution,” he said.
The assets had estimated proved reserves of 517 billion cubic feet equivalent (Bcfe) as of Dec. 31, 2012. In selling half of its reserves, Forest received more than its total market capitalization of about $694 million.
Forest said Oct. 2 that it had received several unsolicited offers for its Panhandle property, which consists of about 100,000 net acres.
The buyer, Templar Energy LLC, is backed by the big money of First Reserve. Templar is led by David Le Norman, who has worked with First Reserve previously. First Reserve is an energy-focused private equity and infrastructure investment firm that has raised $23.1 billion in the past three decades.
First Reserve is also a backer of Midstates Petroleum Co. Inc. (NYSE: MPO), a Houston company with operations in the several plays, including the Anadarko Basin.
Jeff Dietert, managing director and head of research for Simmons & Co. International, said Midstates will likely benefit from the deal because it “puts a nice mark on their recently acquired Anadarko Basin acreage.”
“Additionally, because the buyer of this package is a First Reserve portfolio company, First Reserve is effectively ‘doubling down’ on the Mid-Con given that they are already backing MPO,” Dietert said. “Expectations were probably within a range of $900,000-$1 billion on this deal, so coming in at the high end of this range is likely received positively.”
The divested properties have produced roughly 100 million cubic feet equivalent per day (MMcfe/d) during 2013. Earnings before interest, taxes, depreciation and amortization (EBITDA) were about $180 million for the most recent 12-month period.
Forest does not expect to incur any federal and state income taxes on the sale and intends to use the proceeds primarily to reduce debt and enhance financial flexibility.
As of Aug.1, Forest had $150 million outstanding on its $700 million borrowing base, so the transaction should free up their borrowing base, “although with the sale of roughly half their reserves, the base will likely come down accordingly,” Tameron said.
The transaction is expected to close on or before Nov. 25, with an effective date of Oct. 1.
Patrick R. McDonald, Forest’s president and CEO, said the transaction comprises a major component of the company’s strategic deleveraging program instituted in mid-2012.
In addition to addressing long-term debt, it will give Forest greatly enhanced financial flexibility and liquidity.
“This divestiture sharpens our operational focus and enables us to maintain development efforts in our core Eagle Ford Shale asset, where oil production is projected to show notable growth over the next several years,” McDonald said. “Looking ahead, we have initiated our 2014 capital budget process and will provide further details regarding our future development plans later this year.”
Forest Oil Capital And Drilling Plan, 2013
Total Capital Budget of $355 – $375 million
Drilling capital of $315 - $325 million
Will average six drilling rigs for 2013 as Eagle Ford Shale activity increases
Drilling capital is only being allocated to oil and liquids projects
Source: FST
The sale follows a Sept. 3 deal in which Forest sold its largely undeveloped acreage position in the Permian Basin for $35 million. That transaction included 52,350 net acres located in Crockett County, Texas. Forest retains Permian Basin acreage in Pecos and Reeves counties, Texas, consisting of 63,500 net acres.
Tameron said that could be the next step for Forest.
“We believe FST is interested in monetizing the position, either through a JV or outright sale,” he said. “The acreage is located in Reeves and Pecos, right on top of where other operators have had recent success.”
Tameron suggested that given capital constraints, the best move for Forest’s going forward might be to part with their 635,000 net acres in the Delaware Basin.
J.P. Morgan Securities LLC advised Forest in connection with the Texas Panhandle Area transaction. Le Norman Operating LLC, a wholly owned subsidiary of Templar, will operate the assets.