Forest Oil Management Discusses Q2 2013 Results - Earnings Call Transcript

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 |  About: Forest Oil Corporation (FST)
by: SA Transcripts

Forest Oil (NYSE:FST)

Q2 2013 Earnings Call

August 07, 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

Victor A. Wind - Chief Accounting Officer, Senior Vice President, Treasurer and Corporate Controller

Analysts

Stephen P. Shepherd - Simmons & Company International, Research Division

Michael Hall

Dan McSpirit - BMO Capital Markets U.S.

Paul Grigel - Macquarie Research

Operator

Good day, ladies and gentlemen, and welcome to the Q2 2013 Forest Oil Corporation Earnings Conference Call. My name is Allison, and I'll be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I'd now like to turn the call over to Mr. Larry Busnardo, Investor Relations Director. Please proceed, sir.

Larry C. Busnardo

Thank you, Allison, and good morning, everyone. I'd like to thank you for joining us this morning for Forest Oil's Second Quarter 2013 Earnings Conference Call. Joining me on the call today is Patrick McDonald, Forest President and Chief Executive Officer; Michael Kennedy, Executive Vice President and Chief Financial Officer; and Victor Wind, Senior Vice President, who we announced earlier this week would be taking over as Chief Financial Officer later this month.

If you have not already done so, please go to our website to obtain a copy of our earnings release. A replay of this call will be available through August 21, as described in our press release issued yesterday afternoon.

Before we begin, some of the presenters today will 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 measure calculated in accordance with GAAP will be available on our website and can be viewed by clicking on the Investor Relations tab, then Non-GAAP at forestoil.com. 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 Forest's public filings made with the Securities and Exchange Commission.

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

Patrick R. McDonald

Thanks, Larry. Good morning, everyone. Thanks for joining. I'd like to recognize Victor's promotion to Chief Financial Officer. Victor has been closely involved and instrumental in the execution and strategy of our reorganization and go-forward plan. He's been a key member of our financial team. I'm pleased to have someone with his knowledge and experience serving as a CFO. We look forward to his continued leadership in the role. I'd like to thank Mike Kennedy for his many contributions to Forest Oil over the last 12 years. He'll be missed by all of us, and we wish him well in his future endeavors. I'll turn the call over to Victor now to go through the financial highlights for the quarter, and then I'll come back and talk a little bit about operations and the assets. Thanks.

Victor A. Wind

All right. Thanks, Pat. We made progress on multiple fronts during the second quarter. Earnings and cash flow came in better. The consensus estimates and our portfolio of production was in line with our expectations, including a meaningful growth in oil production. Capital spending for the quarter was in line with guidance, and we were able to reduce slightly our long-term debt.

Moving on to the specifics. With respect to second quarter production volumes, although consistent with last quarter on an equivalent basis at 211 MMcfe/d and quarter oil production of 6,600 barrels per day represented an increase of 14% on a sequential basis, a 23% increase compared to the second quarter of 2012. Each of these pro forma per asset sales.

Clearly, our transition to a more commodity balanced production profile is on track, with second quarter liquids production representing 41% of total equivalent net sales volumes compared to just 37% last quarter.

We would now like to spend a moment on our second quarter capital spending. Exploration and development capital for the second quarter was approximately $69 million. Total capital expenditures, which includes capitalized G&A and leasehold costs, were $74 million. It was in line with the midpoint of the range we gave last quarter of $70 million to $80 million. Despite increased drilling activity during the second quarter associated with our Eagle Ford Shale development program, our total CapEx of $74 million was approximately 45% lower than last quarter's CapEx of $131 million due to the benefit of our partner's carry. One last item to note on our capital expenditures, when comparing our actual CapEx of $74 million for the quarter to what's reflected on our cash flow statement of $102 million, please bear in mind, the cash flow statement number of $102 million represents the actual cash payment for a portion of the drilling and completion work done in the first quarter, not paid until the second quarter. This kind of disconnect is common when there is a significant sequential decrease in CapEx as we had from Q1 to Q2.

Regarding our long-term debt. Forest exited the second quarter with a total debt of $1.63 billion, which represented a $10 million decrease from last quarter. The ratio of total debt to trailing 12-month EBITDA, as defined by our credit facility, was 4.37x at June 30, which is up marginally from 4.34x last quarter.

On the hedging front, with the recent run-up in crude oil prices over the last few weeks, we took the opportunity to layer on additional swaps for the second half of 2013 and also initiated a crude oil hedge program for calendar year '14. The second half of 2013, we added crude oil swaps totaling 2,000 barrels per day at an average price of $99.70. Now at 6,000 barrels per day hedged for the second half of the year at a weighted average price of $96.92. Calendar year 2014, we added 3,000 barrels per day of oil swaps at a weighted average price of $95.10. We'll continue to look for opportunities in the coming months to further hedge our growing oil volumes.

Lastly, with respect to cash costs, we had a good quarter on the expense side as total costs -- cash costs for the second quarter decreased 16% to $66 million compared to $79 million last quarter. The decrease is primarily a result of decreased general and administrative expenses attributable to asset sales and a $7 million decrease in interest expense due to lower average debt balances.

With that, I'll now turn the call back to Pat.

Patrick R. McDonald

Great. Thanks, Victor. Second quarter was a good quarter for Forest as we continue to execute on the goal of positioning Forest in a much better position from operational and financial standpoint. We continued to transition to a more balanced production profiles. We also saw a notable growth in our oil volumes, driven by increased activity in the Eagle Ford Shale development project.

In the Eagle Ford, we ran 4 rigs -- currently running 4 rigs. We added a fourth rig in July. In the Texas Panhandle, running 2 rigs and 1 rig in East Texas. With the addition of the fourth rig in the Eagle Ford in July, we planned to continue the accelerated development plan and maintain this level of activity for the rest of the year.

During the second quarter, the Eagle Ford program, we completed 6 gross, 8 net wells; 9 gross, 4.5 net were online during the quarter. And these wells posted an average 30-day production rate of 529 barrels a day, which is consistent with our expectations and trending above our type curve estimate. This rate also compares favorably to prior period average for 14 wells of 490 barrels a day during 2012. We have currently 7 additional gross wells in early stages of production and flowback. And at the present time, we don't have sufficient information to report; 6 of these wells were completed using the HiWAY frac technique provided by Schlumberger, and we hope to see some results from that program as we go forward.

We continued to refine our drilling and completion programs in collaboration with our partners so that we can further enhance and develop our results. There's an ongoing program of subsurface and reservoir analysis, micro-seismic and considerable amount of science and technology is being applied to production of the wells. We hope to use this data to optimize the well placement of the lateral, as well as the fracture stimulation and design techniques. We're currently implementing these modifications on a gradual control basis so we can monitor the well performance to determine the most optimal completion technique, which provides the greatest balance between initial production rates, reserve recovery and completed well costs. We and our partner are encouraged by these results and look forward to continued improvement throughout the rest of the year and into 2014.

Gross sales volume from the Eagle Ford grew significantly during the second quarter, averaging approximately 4,300 barrels a day compared to 2,700 barrels a day during Q1 of 2013, a 59% increase. Net sales volumes averaged approximately 2,300 barrels a day or a 21% increase compared to first quarter average of 1,900 barrels a day.

As I said, we're currently running 4 rigs and designed our drilling program to hold the maximum amount of acreage. We expect to have the majority of our acreage held by early 2014. And once that is accomplished, we will begin to commence with our development drilling or infill drilling program. We believe that this development program will allow us to focus on the most productive wells and continue to drive our costs down.

As you all know during the -- in July, we announced a concept to sell our Texas Panhandle assets based on unsolicited proposals from third parties, and we've initiated a marketing process to sell these assets. That process is currently underway, and when we do have some information and news, we will certainly communicate that information to you.

We continue to drill our position in the Granite Wash intervals in Wheeler County and elsewhere. We had 1 well during the quarter that had an average gross production rate of 2,400 barrels a day with 71% liquids content. We are currently drilling an offset to that well, and we're anticipating that we'll have another successful completion there adjacent to that well.

In Cotton Valley, Ark-La-Tex region, we had 1 well with a 30-day gross average production rate of 9.8 million a day, 39% liquids. Consistent with previous results, we've continued to operate 1 rig in East Texas, and we'd expect to continue that program through the end of the year.

On balance, we, here at Forest, are pleased with our results during the second quarter. We're encouraged by the continued improvement in the Eagle Ford production profile and our continued effort to reduce cost and create greater capital efficiency. All that is resulting in meaningful oil growth for Forest. And as we anticipate a successful sale of Texas Panhandle assets would be a transformational event and allow us to meaningfully reduce our outstanding debt.

If we are successful in selling the Panhandle, we'd be left with a growth asset in the Eagle Ford Shale, complemented by a very large legacy position in the Ark-La-Tex region, which holds oil and liquids-rich opportunities along with a considerable amount of natural gas opportunities. We also maintain 114,000-acre position in the Permian Basin. And as we watch industry activity come toward us, we hope to be able to create some value around that asset for the company and its shareholders.

So thank you, all. And, operator, I believe we're now available and ready to take questions from the group.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Stephen Shepherd of Simmons & Company.

Stephen P. Shepherd - Simmons & Company International, Research Division

So regarding the uptick in Eagle Ford 30-day IP rates that you all saw during the quarter, to what extent is that attributable maybe to the Schlumberger partnership that you all have formed. And now that you all have been working together, what are some of the advantages that you've seen from that partnership?

Patrick R. McDonald

There's a fair amount of contribution from both teams, both technical teams. It's hard to discern exactly where some of these ideas are coming from because the teams are integrated and working together. It's a little too early to see the actual results from the HiWAY frac program, but we're encouraged by what we see so far. So I think that the answer is you've got some very creative technical people working together and collaboratively on this asset. And we're starting to see the results of the innovations and creative thinking in regard to completions and frac design, as well as the drilling side of things.

Stephen P. Shepherd - Simmons & Company International, Research Division

Okay. And I guess my second question would be, during 2Q earnings, we've seen some other Eagle Ford-focused producers take for their realization assumptions in the basin, the LLS retreat relative to TI [ph] in recent weeks. What's your outlook for Eagle Ford oil differentials going forward? And do you all have any insulation in the form of term sales contracts or are you entirely exposed to spot changes in that spread?

Patrick R. McDonald

We have a contract that runs through November of this year that's an LLS-based contract. So you're right, LLS has come off but still a premium to what we give to WTI-based contract.

Stephen P. Shepherd - Simmons & Company International, Research Division

And can you -- what specifically -- how is that contract priced?

Patrick R. McDonald

There's a differential to LLS for our transportation, primarily about $6.50 off LLS.

Operator

Your next question comes from Michael Hall of Heikkinen.

Michael Hall

Just wanted to, I guess, get a better feel on expectations around the pace of completions in the Eagle Ford here in the second half of '13, in particular the third quarter. How many it was you think you'd be able turn into sales? How many of those will have the HiWAY frac? And just how we ought to think about the pace for the rest of the year?

Patrick R. McDonald

Right now, we drill and complete approximately 4 wells per month. And at the moment, we are running the HiWAY frac on all the wells during this period of time when we try to ascertain the benefits of running that particular program. It's actually somewhat of a special purpose HiWAY frac. It's specifically designed for this reservoir. So we're looking forward to watching the results here through the rest of the year. As we begin to fully run 4 rigs and run pad drilling, we'll start to -- you'll still have some lumpiness in completion from production that will start to even out over time as we get fully into the program.

Michael Hall

So in terms of third quarter then, you have a rough number of how many you would expect to put on to sales?

Patrick R. McDonald

Well, we talked about 7, 8, another -- maybe 14, 15 total during the third quarter.

Michael Hall

Okay. And then, the -- just a little bit more on the HiWAY frac in terms of what the potential expectations are around and the impacts of that program on Eagle Ford wells in terms of costs, but also in terms of potential productivity enhancement. Any additional communication [ph] would be great.

Patrick R. McDonald

We're not ready to put out any target numbers or expectations. We're just waiting to see how we fine-tune this program. But we believe that it will enhance our results, but too early to say.

Michael Hall

Okay, fair enough. And then, in terms of where the wells in the Eagle Ford were put on to sales this last quarter and second quarter, pretty widespread across the acreage footprint and...

Patrick R. McDonald

Yes, more or less, as we use our drilling program to hold acreage. But the areas to the south are currently under drilling. Areas to the south and west are yet to be -- some of that -- most of that is held by production, but we will start moving a little bit further south and a little bit further west with our program through the rest of the year.

Michael Hall

So these are a bit further to the east and a bit further north this patch [ph]. Am I hearing that correctly?

Patrick R. McDonald

The wells in Q2 were more or less in the central area but, again, on non-HBP acreage . So pretty well concentrated, which allowed us to keep our pad drilling and concentration of well. The concentration of the program allowed us to keep our costs down. So far, we're not seeing any dramatic increase in costs as we move to these outer areas as we continue to hold the acreage.

Operator

Your next question comes from Dan McSpirit of BMO Capital Markets.

Dan McSpirit - BMO Capital Markets U.S.

Talking about the Texas Panhandle and the contemplated sale of the assets, you said you received unsolicited bids for the properties. Is the thought behind opening a data room to create a market? Or is that bids were not acceptable to begin with? Or both?

Patrick R. McDonald

No. I would say to the contrary, the bids were sufficient of a level that allowed us to feel confident that there was considerable value that could be achieved through a marketed process.

Dan McSpirit - BMO Capital Markets U.S.

Okay. And with 2 rigs running in the Panhandle today, how does the 102 million cubic feet equivalent per day of current production hold up over the balance of this year? And what is the product mix today in terms of oil, NGLs and natural gas?

Patrick R. McDonald

The remaining year production is expected to remain pretty much flat with respect to the production there. It's about 50% gas, 30% NGLs and 20% oil.

Dan McSpirit - BMO Capital Markets U.S.

Okay. Great. And what is the EBITDA contribution associated with those properties?

Patrick R. McDonald

Last 12-month basis, about $200 million.

Dan McSpirit - BMO Capital Markets U.S.

Okay. And then sticking with the Panhandle, what are the comparable transactions to reference in helping us determine maybe potential value and proceeds from the asset sale? What do you look at?

Patrick R. McDonald

Well, we go back maybe back a year or so ago, you have an Apache/Cordillera transaction, you have a Noble/Unit transaction, you have the NFR/First Reserve transaction. Those are the marker transactions. All the information is pretty well out in the public, and I think you can dig that out.

Dan McSpirit - BMO Capital Markets U.S.

Yes, sure. I appreciate that. And then lastly for me. On the HiWAY frac, I'm much, much less familiar with this technique, this technology. Where else has this technique or technology been employed and tested and what were the results?

Patrick R. McDonald

I'm not exactly familiar with the results, but I know that it has been used elsewhere in the Eagle Ford, and I know it has been used in the Bakken. You might consult maybe Schlumberger's corporate material to make in. Hopefully from there, you can ascertain where it's been used. They've got a pretty robust database of production results that helped us feel confident that it was going to be a good thing for this particular reservoir.

Operator

[Operator Instructions] Your next question comes from Paul Grigel of Macquarie.

Paul Grigel - Macquarie Research

Just touching on the strategic plan on the Panhandle. Is there any kind of sense of timing, is it something you guys hope to wrap up by year end? And then, maybe you could talk to what the proceeds obviously as I've looked at that, but is there notes you want to call back revolver, just maybe a high-level thought on where things stand there?

Patrick R. McDonald

I think in terms of the timeline, year end would be a reasonable expectation. We're on schedule. There is processes underway. We've got companies looking at the information. In terms of the use of proceeds, maybe, Victor, you can speak to that.

Victor A. Wind

Yes. Our plan, Paul, would be to target the senior notes or redemption and getting to see our generally reduced debt.

Paul Grigel - Macquarie Research

And then, has there been any change given kind of the program ramping up here to the amount of acreage you guys think you can hold in the Eagle Ford program going forward?

Patrick R. McDonald

No. I think we're out there with 55,000 acres. And for now, that's a number we're very comfortable with.

Paul Grigel - Macquarie Research

Okay. And then you guys mentioned in early 2014, having acreage held, the cost have come down on the program pretty well, is there additional cost savings that can be realized through pad drilling? And how well do you think the per-well cost can hit?

Patrick R. McDonald

We think so certainly. And as you move toward more of a development pace, the development style of drilling, we hope to achieve even greater off-savings as we concentrate the program in areas that are already held by production and where the infrastructures is already in place. We also think the installation of the midstream asset base, the oil, water, gas, handling facilities are going to allow us to reduce our well cost as a fact that there is some midstream or infrastructure associated with each and every well, AFE at the moment. As we go forward, we'll be able to centralize our facilities [ph] and cut with that well cost out of the each individual well. What is our target? We're sort of in the 6 million range now. We hope to be able to drive that even lower. I would say by mid-second quarter of next year, we'll have a much better sense of how that development drilling will result at even lower well costs.

Paul Grigel - Macquarie Research

And then lastly, just on the Permian, could you speak to any interest you guys have seen from outside parties or uptick given some of the recent results from across the basin?

Patrick R. McDonald

Yes. General increase in the level of inquiries and attention to our particular asset base. We're encouraged by recent adjacent nearby well results from outside operators. And we hope that translates into greater level of interest, perhaps actionable transaction.

Paul Grigel - Macquarie Research

Is that something you guys are currently active in marketing or would you need to undertake a data processor? Could you do a one-off negotiated transaction?

Patrick R. McDonald

There's a fair amount of inquiry outside of it. We don't have a process underway, so we're more or less comfortable with the level of interest that we are being shown right now. So try to come up with a concept that creates some of those value.

Operator

I'd now like to turn the call back over to Larry Busnardo for closing remarks.

Larry C. Busnardo

Okay. This concludes our conference call. I want to thank everyone for your interest and participation in our call. If you have any further questions, feel free to contact us. Thank you.

Operator

Thank you. Ladies and gentlemen, this concludes your presentation. You may now disconnect and good day.

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