Denver-based Forest Oil Corporation’s (FST) first quarter 2011 earnings of 19 cents per share (excluding non-recurring items), came in well below the Zacks Consensus Estimate of 33 cents and year-earlier numbers of 42 cents. Despite higher sales volumes, earnings missed our estimate due to lower natural gas price realization.
Total revenue in the reported quarter decreased 8.5% to $203.1 million and missed the Zacks Consensus Estimate of $231 million.
Net sales volumes grew 2% year over year organically to 425.3 million cubic feet equivalent per day (MMcfe/d) in the reported quarter.
The average equivalent price per Mcf (including the effect of hedging) was $5.57, down from the year-ago realization of $6.08. Average realized price was $4.34 per Mcf of natural gas, down 15% from the comparable prior-year quarter.
Average realized price was $85.35 per barrel of oil, up almost 17% from the year-ago quarter. Natural gas liquids (NGLs) were sold at $35.06 per barrel, down more than 13% from first quarter 2010.
During the quarter, production expenses increased 10.8% year over year to $1.34 per Mcfe. Unit general and administrative expenses remained flat year over year at 36 cents per Mcfe. Depreciation and depletion expenses per unit increased 27% to $1.76 per Mcfe from $1.39 per Mcfe in the corresponding 2010 quarter.
At quarter end, Forest had $163.3 million of cash and cash equivalents with $1.870 billion of long-term debt, representing a debt-to-capitalization ratio of 57.8% (down from 58% at the end of fourth quarter 2010).
Forest expects net sales volume of 490 MMcfe/d for 2011, with 10% organic increase compared with last year’s expectation. Net sales volumes would comprise of approximately 70% natural gas and 30% liquids (13% crude and condensate and 17% natural gas liquids).
Management also forecasts expending $600 million to $650 million, mainly for the enhanced drilling program at its liquids-rich Granite Wash assets in the Texas Panhandle, Deep Basin gas assets and Peace River Arch light-oil assets in Canada.
Importantly, almost 80% of the capital expenditure will be apportioned to liquids-rich prospects. The remainder is to be shelled out primarily for gas development in the Deep Basin of Alberta, Canada, that promises profits in the form of provincial royalty incentives.
We like Forest Oil’s initiatives toward increased liquids production. The company’s focus on cost control and the upside from Granite Wash and Haynesville position it well to weather the weakness in natural gas prices. The company anticipates cash costs to range between $2.15 and $2.35 per Mcfe, down approximately 7% from the 2010 annual guidance.
While an improvement in terms of debt reduction is palpable, it still lies at an above-average level versus its peers such as Apache Corp. (APA) and Devon Energy Corporation (DVN). Consequently, we maintain our long-term Neutral recommendation for the stock. Forest Oil also holds a Zacks #3 Rank (short-term Hold rating).