Forest Oil: A Tale Of 2 Halves

Feb.21.13 | About: Forest Oil (FST)

With the 4Q 2012 earnings results out of the way, investors will shift focus to upcoming strategic actions by Forest Oil (NYSE:FST) beyond the $600 million in asset sales in 2012.

Potential sales of Permian acreage and other undeveloped acreage could yield asset sale proceeds of $500 million and lower the implied EV/EBITDA multiple from 6x to 5x in the near term.

FST guided oil production to be up strongly (+30%) in 2013 as all drilling capex will be focused on oil drilling. Gas drilling and NGL focused drilling has been shut down completely, the overall production growth rate was not mentioned in guidance but total production guidance looks to be a modest (5-10%) decline in total production, but with 2H 2013 production being higher than 1H 2013. Presumably total production (not just oil) will be sustainable from 2H 2013.

Expectations were low for production growth as capex has been slashed and assets are being sold to repay debt. The trading action ahead of the print was so bad that I suspect the hurdle is low for FST. We will see tomorrow how that shakes out.

This tidbit from the press release caught my attention, as the strategic actions by FST outweigh the short-term production and earnings noise:

Our strategy for 2013 is well defined and the Company is focused on oil and liquids projects. We will concentrate on capturing the value that is embedded within our large asset base, while maintaining spending near projected cash flow. While considerable progress has been made in restoring operational and financial flexibility, our challenge will be to accelerate the development of our asset base in 2013.

The last sentence is the most important as how FST addresses this challenge will dictate how FST stock trades in 2013. With Hedge Funds like SAC, Owl Creek and WestFace (recently joined the board of directors) heavily involved expect continued focus on assets sales, or a sale of the whole company.

Now that FST has cut drilling on Granite Wash, Haynesville and is running at low speed in its core Oklahoma oil and Eagle Ford oil projects, there is certainly room for further asset sales. With the stock at about 5x 2013 EV/EBITDA, if FST and the hedge funds can come up with something, 2013 could finally be FST's year.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.