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Forest Oil Corporation (FST)

April 12, 2013 9:00 am ET

Executives

Larry C. Busnardo - Director of Investor Relations

Patrick R. McDonald - Chief Executive Officer, President, Director and Member of Executive Committee

Michael N. Kennedy - Chief Financial Officer and Executive Vice President

Analysts

Pearce W. Hammond - Simmons & Company International, Research Division

Brian Singer - Goldman Sachs Group Inc., Research Division

David R. Tameron - Wells Fargo Securities, LLC, Research Division

Joseph Patrick Magner - Macquarie Research

Jason Gilbert - Goldman Sachs Group Inc., Research Division

David Deckelbaum - KeyBanc Capital Markets Inc., Research Division

John P. Herrlin - Societe Generale Cross Asset Research

Gregg Brody - JP Morgan Chase & Co, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Forest Oil Details Accelerated Eagle Ford Shale Drilling Program. My name is Stephanie, and I will be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. And now, I'd like to hand the call over to Mr. Larry Busnardo, Director of Investor Relations. Please go ahead, sir.

Larry C. Busnardo

Thank you, Stephanie, and good morning. I want to thank you for joining us today. We issued 2 press releases this morning, one announcing the signing of a development agreement with Schlumberger for our Eagle Ford Shale asset and one detailing plans for accelerated Eagle Ford Shale drilling program. We have also posted a slide presentation on our website that will be used in conjunction with this call. You can find the slides under the Investor Relations section of our website and then go under Presentations, and you should find them there.

I would also like to note that a replay of this call will be available through April 19. The details are in the release that details the accelerated drilling program.

Joining me on the call today is Patrick McDonald, Forest's President and CEO; and Michael Kennedy, Executive Vice President and Chief Financial Officer.

Some of the presenters today may reference certain non-GAAP financial measures regularly used by Forest in measuring its financial performance. Reconciliations of such non-GAAP financial measures with the most comparable financial measures calculated in accordance with GAAP is available on our website and can be used by clicking on the Investor Relations tab, then Non-GAAP, at forestoil.com.

In addition, Forest's comments today will include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements are subject to a number of risks and uncertainties that may cause the actual results in future periods to differ materially from the forward-looking statements. These risks and uncertainties are described in Forest's earnings release and in Forest's public filings made with the Securities and Exchange Commission.

With that, I will now turn the call over to Pat.

Patrick R. McDonald

Good morning, everyone. Thank you for joining us on the call. We're pleased to report the signing of a definitive agreement with Schlumberger for the future development of our Eagle Ford Shale acreage. We believe this Eagle Ford asset is a valuable oil resource, which holds significant development opportunities. After several months of conducting their own thorough technical review, Schlumberger also came away with a similar view of the asset, and we're pleased to have them as our partner. Being strategically aligned and working together with a partner with such technical capability as Schlumberger will greatly enhance the value of this asset and help us to achieve the best possible results.

One of our stated strategic initiatives for the year was to evaluate attractive opportunities to accelerate the development of our opportunity set, and this transaction helps to accomplish this. The Eagle Ford was a high priority for us and -- as this was our most pressing area due to the pending lease expirations and our desire to hold and develop a larger acreage position.

We believe the transaction is important for several reasons. The transaction economics are very attractive, as our opportunity cost was only a net 12,500 acres compared to the 40,000 net acres we were able to hold on the go-it-alone plan. This calculates to an acreage value of approximately $7,200 an acre when factoring in the $90 million drilling carry provided by Schlumberger. The agreement allows for an accelerated drilling program resulting in oil production growth and improved project economics as we implement the leading-edge technologies and achieve economies of scale, which should result in the best possible well productivity and lowest possible well cost. The drilling carry, combined with the accelerated development activity, brings forward approximately $250 million of PV-10 economic value to the Forest shareholders. We believe Schlumberger's extensive experience in developing unconventional shale resources across the globe, and particularly in North America, will allow us to optimize all facets of our drilling and completion operations to achieve the best possible result for Forest and our shareholders, and we look forward to leveraging this expertise as we move forward.

May I ask you, please, to turn to the slide presentation on Slide 2. It describes an overview of the transaction. As we outlined in our press release, Schlumberger will pay a $90 million drilling carry to earn a 50% working interest in the Eagle Ford Shale position held by Forest. Forest will remain the operator of the program, and we plan on increasing drilling activity to 4 rigs from the 1- to 2-rig plan currently in place. We expect this level of activity to be fully active by the third quarter of 2013.

The accelerated development program is designed to allow us to hold an additional 15,000 gross acres beyond our original 40,000-acre go-it-alone plan, which will increase the total gross acres held in the field to 55,000 acres. We have significant drilling opportunities on our acreage with nearly 700 gross locations identified using 80-acre spacing and over 100 million barrels of unrisked resource potential net to Forest oil.

We are projecting oil production from the Eagle Ford to increase from an average of 1,600 barrels a day net in 2012 to over 6,500 barrels per day net in 2014. The drilling carry capital amount, combined with the accelerated pace of development, allows us to bring forward, as I said, approximately $250 million in PV-10 value to Forest.

The next slide page on 3 -- Slide 3 shows the benefits of the accelerated plan compared to our current development plan. Our current plan -- well, prior to the announcement, the plan allowed for 40 gross and net wells. The accelerated plan will allow us to drill 140 gross or 70 net wells over the next 2 years. The accelerated plan will result in 10 and 20 additional wells being drilled in 2013 and 2014, respectively, but the additional 2013 wells are scheduled to be online later this year, so we do not anticipate that the program will materially affect Forest Oil's average net sales volumes for 2013. We believe the full benefit of the program will be achieved in 2014, as we anticipate double the amount of production in the full year of 2014 as the program commences and begins to result in greater number of wells and product production from the field.

We are currently projecting that the Eagle Ford program will generate lease level income in 2013 of approximately 68% of the total net capital expenditures and 80% of the total net capital expenditures for 2014. Lease level income is expected to be approximately equal to the EBITDA, and I would note that the accelerated plan will generate $75 million more in lease level income in 2014 compared to the previous development plan.

On Page 4, we'd like to show a comparison of the development plan. The current development plan with the benefit of the Schlumberger's participation is an accelerated development plan to drill 140 gross and 70 net wells. The black horizontal well indicators show that the current previous plan of 40 total wells over the next year -- 2 years, while the red sticks represent additional wells from the accelerated plan. The accelerated development plan allows us to drill to the south and east of our identified central fairway area and will allow us to capture an additional 15,000 acres of mineral rights. As we have communicated in the past, we have always wanted to keep that acreage, as the Eagle Ford [indiscernible] is generally deeper and thicker, and now that we have the capital resources, we expect to be able to hold that additional acreage.

Slide 5 would show the impact of the accelerated drilling program on cumulative production. This slide includes wells put on production after April 1, 2013, and does not include any prior wells, as they are excluded from the transaction with Schlumberger.

While the impact of the increased drilling program is somewhat muted in 2013 because of the timing of the increased production, there's a significant acceleration of volumes in 2014, and we expect that to result in a meaningful oil percentage growth from the company -- in the company's production mix.

Starting in 2014, the accelerated development program starts to significantly outpace the previous plan. The accelerated plan allows Forest to increase 2014 average net volumes to over 6,500 barrels a day net compared to the previous estimate of 3,700 barrels per day net. We can achieve this volume growth net to Forest with only a $20 million increase in our previous expected capital spending in the field.

Page 6 shows the transaction summary and we believe highlights the important contribution from Schlumberger, not only in the form of capital, but the technology to integrated services, which will allow us to increase the productivity and the well results in the field. We're looking forward to working with them and being the beneficiary of their global resources and the vast technological capabilities that reside within their organization.

We remain committed to the development of our high-margin oil projects, and throughout this partnership, we believe we are projecting significant production growth over the next several years, which will bring forward significant economic value for Forest and our shareholders.

I'd like to thank you all again for your participation in the call, and we'll open the call for questions. Thank you, operator.

Question-and-Answer Session

Operator

[Operator Instructions] And the first question comes from the line of Pearce Hammond from Simmons & Co.

Pearce W. Hammond - Simmons & Company International, Research Division

Well, congratulations on the deal.

Patrick R. McDonald

Thanks, Pearce.

Pearce W. Hammond - Simmons & Company International, Research Division

The first question is, how do you handle service costs in the relationship with Schlumberger. Is Schlumberger going to be charging a market rate, or is it some sort

[Technical Difficulty]

Patrick R. McDonald

Stephanie, it appears we have lost Pearce.

Operator

We have lost Pearce. I do apologize. I'm not sure what's happened.

Patrick R. McDonald

Okay. Let's go to the next question.

Operator

The next question comes from Brian Singer from Goldman Sachs.

Brian Singer - Goldman Sachs Group Inc., Research Division

Can you talk to the geologic characteristics of the incremental 15,000 acres relative to your base 40,000? Are there any material differences in how you see those locations and returns, or is it just simply you couldn't get to them previously?

Patrick R. McDonald

The latter, David. The -- we've always thought that those acres to the south and east had the same geological and reservoir characteristics as the main part of the field, so we don't differentiate between locations in the main, previous 40,000-acre area and now the acres that we will be able to capture with the increased program.

Brian Singer - Goldman Sachs Group Inc., Research Division

Great. And then, over what time period do you expect, based on your development plan, the carry to be paid?

Patrick R. McDonald

The carry gets exhausted by middle of 2014.

Brian Singer - Goldman Sachs Group Inc., Research Division

Great. And lastly, as you had conversations with Schlumberger, did -- was it your sense that they were looking to more widely insert themselves into other of either your others' upstream assets, or was it your sense that this was just more of a one-off opportunity for both you and them?

Patrick R. McDonald

I guess that's not part of our discussion today, David. We can't speculate as to what their plans are.

Operator

The next question comes from Pearce Hammond.

Pearce W. Hammond - Simmons & Company International, Research Division

Hopefully, I've got no troubles here. I was curious how you handle service costs in the relationship with Schlumberger. Will they be charging a market rate, or is there some sort of pre-agreed level?

Patrick R. McDonald

Competitive market rates, which prices are fixed for the first part of the program.

Pearce W. Hammond - Simmons & Company International, Research Division

And when you said the first part of the program, you think like through the end of this year, and then it changes to some sort of market level thereafter?

Patrick R. McDonald

Pearce, through June 30, 2014, they're fixed at current levels, and then the -- and then we have go-to-market rates.

Pearce W. Hammond - Simmons & Company International, Research Division

Okay. And then, when we step out to 2015 after the carry's been exhausted, what do you think the net CapEx is to Forest to keep those 4 rigs running?

Patrick R. McDonald

Four rigs is approximately $240 million a year. That's -- if it's 80 wells, each well is approximately $6 million right now, so that's $480 million. So net to us would be $240 million.

Pearce W. Hammond - Simmons & Company International, Research Division

And then lastly, any other opportunities to pursue this, maybe in a place like the Panhandle?

Patrick R. McDonald

As we've said, we're seeking partnerships, other alternative sources of capital for our entire asset base. So the answer is yes, we're looking at these similar types of opportunities in other areas.

Operator

The next question comes from Mr. David Tameron from Wells Fargo.

David R. Tameron - Wells Fargo Securities, LLC, Research Division

Just to clarify, this doesn't -- there's no production involved in this, right? So it's only wells placed online post April 1?

Patrick R. McDonald

That's correct.

Michael N. Kennedy

Correct.

David R. Tameron - Wells Fargo Securities, LLC, Research Division

Okay. All of this is said and done, they will have 50% of the acreage, right, when all that's said and done?

Patrick R. McDonald

Right, yes.

David R. Tameron - Wells Fargo Securities, LLC, Research Division

Okay. And then, Mike, any other financial impacts that we should think about as far as '13? Any other changes in any of your existing LOE and any changes along those lines, any new ops [ph] in agreement that were changed?

Michael N. Kennedy

No, we're modeling the same, David.

David R. Tameron - Wells Fargo Securities, LLC, Research Division

Okay. And is it the right way to think about this is whatever we have for '14, we should just tack on an extra 2,800 barrels a day? I guess the bigger picture question, any other changes to '14 based on this other than acceleration in the Eagle Ford?

Michael N. Kennedy

No.

Operator

The next question we have is from Joe Magner from Macquarie Capital.

Joseph Patrick Magner - Macquarie Research

Just -- I wonder if you could walk through the map on the acceleration of the PV, the $250 million acceleration of the PV. It looks like -- sort of compare what you thought you could hold under the previous plan versus what you will be able to hold now under this transaction. You're giving up a decent amount of resource potential in exchange for acceleration of the development that remained. Just curious if you could share some more information on this now.

Patrick R. McDonald

The $250 million is comprised, obviously, first of the $90 million drilling carry, and then second, without this transaction, we only had the capital to run 1 rig program, and that would have only held 40,000 acres, and to run the 1-rig program out in time really did not accelerate the production into the early years. Now with the ability to run 4 rigs, that production gets greatly accelerated up into the first 5 years. So that additional $160 million on top of the $90 million is just the acceleration of production volumes.

Joseph Patrick Magner - Macquarie Research

Okay. And I guess, there was a previous question asked about what happens beyond 2014. In the next year, it looks as though your CapEx requirements are going up, your cash flow shortfall is going to trend up. Does that start to normalize beyond next year, or is there something else to think about?

Patrick R. McDonald

Yes. Next years with this program, it only goes up $20 million compared to the go-it-alone plan. Our lease level income increases $175 million compared to $100 million on the go-it-alone plan in the capital, so that's a $75 million increase, and the capital is only up $95 million. So that's only a $25 million increase, but obviously, with the increased volumes, we'll be able to cover that off. In '15, it gets close to being funded status, and in '16, it is.

Joseph Patrick Magner - Macquarie Research

And just one thing, just to clarify that. On the lease level income, $175 million, is that -- that's net to Forest, or that's the lease level, net lease level?

Patrick R. McDonald

The net to Forest, yes.

Operator

The next question comes from the line of Jason Gilbert from Goldman Sachs.

Jason Gilbert - Goldman Sachs Group Inc., Research Division

Most of mine have been answered. I was just wondering if you could clarify, what is the impact on full company production guidance for '13? I think you were at 220 to 230 per day earlier, but I don't know if we had just the Eagle Ford before.

Patrick R. McDonald

Yes, the guidance is unchanged. It's the same production volumes.

Jason Gilbert - Goldman Sachs Group Inc., Research Division

Same production volumes.

Patrick R. McDonald

And working capital.

Jason Gilbert - Goldman Sachs Group Inc., Research Division

Okay. And what about oil? What about liquids gas mix?

Patrick R. McDonald

It's the same.

Jason Gilbert - Goldman Sachs Group Inc., Research Division

Okay. And then also, did you mention in your commentary that the implied evaluation was 7,200 per acre? I was just trying to figure you out how you got that math.

Patrick R. McDonald

Yes, before this, we had a net 40,000 acres, Jason. After this transaction, we'll have a net 27,500. That's a 12,500-acre difference. When you divide $90 million by 12,500, it comes up to 7,200 per acre.

Operator

The next question comes from Mr. David Deckelbaum from KeyBanc.

David Deckelbaum - KeyBanc Capital Markets Inc., Research Division

I just really had 2 quick questions about the nature of the pact with Schlumberger now. It -- does this -- are completion methods in your Eagle Ford area changing right now? Is there any sort of new technology being introduced that sort of has improved some confidence around the position outside of the economics that you've laid out so far? And with them as your partner now, is this going to change how you guys are thinking about completing your wells going forward?

Patrick R. McDonald

We've already begun the interaction and the relationship with Schlumberger, and we're already seeing some very good ideas being discussed amongst the group. We have not implemented any of those changes, but over the last 6 to 9 months, we've steadily improved our completion and frac-ing and well productivity. So we're looking forward to continuing along that path. Nothing -- there is no radical change, but I think incrementally, we're going to see better well results, better productivity from our wells going forward.

David Deckelbaum - KeyBanc Capital Markets Inc., Research Division

Okay, great. And I guess my last one is just, now that you've completed this deal, and it's really, I guess, the goal was as you talked about before, resuming growth in the back half of '13. And there's obviously acceleration of production growth in '14. Do you still -- as you look at other opportunities, you said you'd be interested in doing something like this on perhaps your Panhandle positions. You just laid out more inventory in the oily portion of Panhandle. Is the focus now on finding partners to help you accelerate, or is the focus still looking for a large cash component that would help you would delever? Or how do you guys look at that right now?

Patrick R. McDonald

Our primary focus is on accelerating growth and development of the assets, both with internal resources and perhaps external resources.

Operator

The next question comes from John Herrlin from Society General.

John P. Herrlin - Societe Generale Cross Asset Research

Two quick ones. Was this a data room situation, or you just talked with Schlumberger?

Patrick R. McDonald

No, no, it was not a data room.

John P. Herrlin - Societe Generale Cross Asset Research

Okay, great. With the accelerated drilling, how about infrastructure, gathering, et cetera?

Patrick R. McDonald

Yes, sir. That's a good question. We're actively engaged in a midstream buildout, which would handle all of the oil, the gas and the water-handling facilities. There will be a third party capital provider.

Operator

The next question comes from Mr. David Tameron from Wells Fargo.

David R. Tameron - Wells Fargo Securities, LLC, Research Division

Just a couple of follow-ups. So if you look at the 55,000 gross under the accelerated development plan, should we just assume the other 45,000, is that -- should we assume those expire? Is that potential assets in option...

Patrick R. McDonald

Yes. At year end, David, it was 86,000. It wasn't 100,000 or so, but the other 30,000, like we've always talked about, to the North is going to expire.

Michael N. Kennedy

Expire, and we still got some one-off transaction concepts involving a some of the other fringier acreage. But they're just ongoing land efforts.

David R. Tameron - Wells Fargo Securities, LLC, Research Division

Okay. Can you talk about why Schlumberger versus an industry partner? I mean, I guess John kind of asked this question. But it wasn't a data room, but any color you can give us on that process?

Patrick R. McDonald

Well, I think the most impressive part about it is their technological capability and the resources, which they bring to the table. We expect to benefit greatly from access to all of their resources and their capabilities.

David R. Tameron - Wells Fargo Securities, LLC, Research Division

All right. And then finally, Pat, just because I'm going to ask a question that stock has been getting -- has been under pressure. Any color you care to give us around that, or any -- I know you can't control the stock price, but anything you want to say along those lines?

Patrick R. McDonald

No. Whatever you can do to help would be greatly appreciated.

Operator

The next question comes from Gregg Brody from JPMorgan.

Gregg Brody - JP Morgan Chase & Co, Research Division

I was just curious. Is there any potential for additional partnerships here with Schlumberger? Is there anything in the agreement that -- for that?

Patrick R. McDonald

No, there's nothing in agreement, no.

Gregg Brody - JP Morgan Chase & Co, Research Division

Do you think that there's -- from your sense, just asking the question a different way, do you think there's other acreage that you might be interested in and they might be interested in partnering with you to acquire? Or do you think this is more of them demonstrating technology?

Patrick R. McDonald

That's not part of the discussion, so I can't really answer that question.

Operator

The next question comes from Joe Magner from Macquarie Capital.

Joseph Patrick Magner - Macquarie Research

Thanks for the follow-up. I guess based on the way things are laid out, there isn't any evidence that you're planning to shave any cost off the wells or accelerate development or efficiencies of the rigs. Has Schlumberger shared with you anything that provides you with any insight into, perhaps, your ability to improve efficiencies or improve per well recoveries, drop well costs from where they are today?

Patrick R. McDonald

Yes, absolutely. That's an integral part of the relationship. We've already dropped our well costs significantly, nearly 20%, by going to pad drilling, and we see continued improvement in -- mainly on the really on the productivity side. So we're hoping to create our -- manufacture our own margin as a result of this relationship and the economies of scale in the accelerated program.

Joseph Patrick Magner - Macquarie Research

I guess it doesn't look like you're building any of those assumptions into the map at this point, so I'm just curious what else we can go onto...

Patrick R. McDonald

Yes, I guess at this point, it's a qualitative assessment of how it's going to be going forward at some point. And when we can document and demonstrate be actual results, we may change our outlook.

Operator

Thank you. There are no more questions. Ladies and gentlemen, thank you for joining today's conference. This concludes the presentation. You may now disconnect. Have a good day. Thank you.

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