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Forest Oil (NYSE:FST)

Q2 2012 Earnings Call

July 31, 2012 2:00 pm ET

Executives

Larry C. Busnardo - Director of Investor Relations

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

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

Analysts

Brian Singer - Goldman Sachs Group Inc., Research Division

Brian Lively - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

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

Michael A. Hall - Robert W. Baird & Co. Incorporated, Research Division

Duane Grubert - Susquehanna Financial Group, LLLP, Research Division

Biju Z. Perincheril - Jefferies & Company, Inc., Research Division

Dan McSpirit - BMO Capital Markets U.S.

Bradford Alan Evans - Heartland Advisors, Inc.

Gregg Brody - JP Morgan Chase & Co, Research Division

Peter Brotchie

Scott Hanold - RBC Capital Markets, LLC, Research Division

Brian T. Velie - Capital One Southcoast, Inc., Research Division

Joseph Patrick Magner - Macquarie Research

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

Joe Lu

Cody Campbell

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2012 Forest Oil Corporation Earnings Conference Call. My name is Shaquana, and I will be your coordinator for today. [Operator Instructions] I would now like to turn the presentation over to your host for today's call, Mr. Larry Busnardo, Director of Investor Relations. Please proceed, sir.

Larry C. Busnardo

Good afternoon. I want to thank you for participating in our second quarter 2012 earnings conference call. A replay of this call will be available through August 14 as described in our press release issued yesterday. Joining us on the call today is Patrick McDonnell, Forest's Interim CEO; and Michael Kennedy, Executive Vice President and CFO.

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 viewed by clicking on the Investor Relations tab, then non-GAAP at forestoil.com. In addition, I'd like to caution you about our forward-looking statements. All statements other than statements of historical facts that address activities and outcomes that Forest expects, assumes, plans, believes, budgets, forecasts, projects, estimates, anticipates, et cetera, about what will, should or may occur in the future are forward-looking statements. Please carefully review our cautionary language regarding forward-looking statements as it's contained at the end of our press release.

And with that, I'll turn the call over to Michael Kennedy.

Michael N. Kennedy

Thanks, Larry, and thanks to everyone joining us today. I'll keep my comments relatively brief and touch on a couple of the highlights for the quarter, as the press release issued yesterday afternoon covers the quarter in detail. Second quarter 2012 equivalent production came in at 335 million per day. This is unchanged on a year-over-year basis. Our focus on oil projects continues to pay dividends, as second quarter oil volumes increased 27% over the same period last year. This upward trend will continue as Forest Oil, 4 of our 5 rigs targeting oil projects by the fourth quarter.

Third-party infrastructure issues in the Panhandle persisted in the second quarter, which negatively impacted production by approximately 8 million per day due to downtime associated with the third-party NGL facility. The plant was returned to operations on July 3. Unplanned downtime is frustrating, and we continue to incorporate additional gas gatherers for our Panhandle production. This will provide us with flexibility and optionality, and should help to minimize these unplanned curtailments going forward. We should begin to see these benefits beginning later this year.

We, along with the industry, continue to feel the effects of lower natural gas prices this year. Due to this, Forest recorded a ceiling test write-down of $345 million in the second quarter. The write-down is primarily a result of the significant decline in the 12-month trailing natural gas price used in the ceiling test calculation from $3.73 per Mcfe last quarter to $3.15 per Mcfe this quarter. Given the current pricing environment, we expect a ceiling test write-down in the third quarter as well. We also recorded a deferred tax asset valuation allowance of $290 million due primarily to the ceiling test write-down.

As the natural gas environment has remained depressed, our hedge position continues to work in our favor, as we realized a 73% uplift to our unhedged realized price. This translated into a $28 million realized gain on our second quarter gas hedges.

We have selectively added to our natural gas hedge position for 2013 by adding 26 million per day of swaps at $3.78. We now have 155 million per day of swaps for the second half of 2012 period at $4.63 and 160 million per day for 2013 at $3.98. A full summary of our hedge position can be found on Page 6 of the press release or in the 10-Q to be filed later.

We have taken the initial steps in improving the company's financial strength and flexibility. The first step was reducing second half capital expenditures to a range of $190 million to $210 million, or about cash flow. This leads [ph] down significantly from the first half run rate and will allow us to align spending more closely with expected cash flow levels by the start of the fourth quarter. Secondly, we will first look to monetize non-reserve-based and noncore assets. These are primarily assets outside our core Panhandle, Eagle Ford and East Texas areas. We hope to have a couple hundred million of asset sales over the next several quarters completed and will continue the effort throughout 2013. The process is underway, and we will update you once we have something to report.

So to summarize the quarter, we continue to see solid organic growth in our oil production. We expect oil volumes to continue this growth in the second half of 2012. We are well hedged, have a good liquidity position with over $750 million available in our bank facility and our planned divestitures will further improve our financial position.

I will now turn the call over to Pat McDonald for comments.

Patrick R. McDonald

Thanks, Michael. And hello, everyone, and thank you for joining us. I've had the pleasure of meeting some of you, but not all of you. And I look forward to meeting each of you as we go forward here in the development of the new Forest Oil. Second quarter was a busy time for Forest as we strategically realigned the operating and financial priorities of the company. We made some organizational changes. I've been impressed by the quality of the assets and the quality of the personnel that manage and develop the assets. We're still in the early stages of this transformational process, but we are all encouraged by the progress to date.

We continue to post solid results, and our increased focus on oil projects is paying dividends. As Michael mentioned in his comments, oil volumes continue to grow and we're up 27% over same period last year. We expect this trend to continue during the second half of the year.

In reference to our Eagle Ford Shale development, we have made the decision to move forward with the development of this important asset and now have 2 rigs operating in the central fairway of the play, with activity increasing as we go into the third and fourth quarter.

The well results have become more consistent and reliable. Our latest well was completed at an average IP rate of 900 barrels of oil per day and after a 30-day rate, it's still holding in at close to 700 barrels of oil per day. This rate compares favorably with the 3 most previous wells prior to that, that had average IP rates of 780-some barrels of oil per day. We'll continue to run 2 rigs in the field through the rest of the year, and as we formulate our plans for 2013, we'll look at how we continue to develop that asset. We're encouraged by these results, and believe our sizable inventory of locations will form a firm foundation for our oil growth over future quarters.

We also continue to have good success in the Panhandle oil drilling program. We've completed 1 Hogshooter well this past quarter that had initial production rate of 2,800 Boe per day. This has turned into a pretty attractive program for the company. We've now completed 5 Hogshooter wells that have come online at average initial rates of just over 3,000 barrels a day per well.

Also in the Panhandle, we're focusing on the Cleveland formation, which during the last quarter, we completed 2 Cleveland formation wells at an average of 1,000 barrels a day equivalent each. The Panhandle asset base is oil rich. It has a large number of hydrocarbon liquid and black oil zones, and we continue to focus on those as we develop the other opportunities which exist within that resource base.

In regard to the search for a permanent CEO, I think everyone knows we've engaged the Spencer Stuart search firm. The process is underway. The board is fully engaged, and there were -- a number of candidates have been brought to the table.

We've recently laid out our second half strategic plan. As Michael made reference to, we've adjusted our capital spending to focus on the core oil assets in the Panhandle and in the Eagle Ford shale play in Texas. We look forward to continuing to build upon this foundation as we go forward. We've adjusted our second half spending rate to be near expected cash flow by the end of the year.

And as Michael referenced, we're actively engaged in divesting noncore nonstrategic assets. The focus will be on executing on our core asset group and providing the financial flexibility that comes with having our oil and gas results match our forecasts and our resources.

We're making strides from both operational and financial standpoints. We understand there's more work to do. The board understands there's more work to do, but we're well positioned with good assets and the right people to manage those assets and create value from the assets as we go forward.

That concludes my remarks. Again, thank you for joining us. And operator, we are prepared for questions, should there be any questions.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Brian Singer, representing Goldman Sachs.

Brian Singer - Goldman Sachs Group Inc., Research Division

Can you talk to the areal extent in the Hogshooter that you're seeing, and also the well costs currently and where you think you can take them to?

Michael N. Kennedy

Yes, I think we've identified about 45 locations. It's pretty much all in Wheeler County right now. We're searching throughout the remainder of the acreage, Brian, to see if there's anymore Hogshooter locations available to us. And the well costs are between $7 million and $8 million.

Brian Singer - Goldman Sachs Group Inc., Research Division

And what types of declines are you seeing from the wells that you'd already drilled [indiscernible]...

Michael N. Kennedy

They're hyperbolic declines.

Brian Singer - Goldman Sachs Group Inc., Research Division

Typical kind of 80% first year, 70% first year?

Michael N. Kennedy

That's right.

Brian Singer - Goldman Sachs Group Inc., Research Division

Okay. And then strategically, would you characterize the reduction in capital spending and more of the focus of spending within cash flow in the second half of this year as temporary until a new strategic plan is adopted? Or does the board see staying within cash flow as a key priority over a medium- or longer-term basis as they look for a permanent CEO?

Patrick R. McDonald

No, I think that has been our strategy pretty much for a long time, is to try to stay within cash flow. The last 2 years when we were trying to transition to more of an oil resource space, we had to go out and try to acquire that through leasing. But going forward from here, we'll definitely try to stay within cash flow, or at or near it, Brian.

Operator

Your next question comes from the line of Brian Lively, representing Tudor, Pickering, Holt.

Brian Lively - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Just a couple of questions. On the planned asset divestitures, can you guys categorize where the Permian fits in that in terms of noncore, nonstrategic?

Michael N. Kennedy

If fits squarely on that.

Brian Lively - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

And what have you guys seen from that acreage at this point to suggest that it's lower at least on the seriatim within the portfolio?

Michael N. Kennedy

Just the amount of development capital that would take, Brian. I mean, with where our balance sheet's at, we don't have the ability to develop all the assets that we have. With Eagle Ford, much farther along with much more drilling on it and more towards a development program. The Permian is the one that kind of gets left out and is the one that we cannot fund.

Brian Lively - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

And have you guys started the process for that? Is there a data room open or is that still...

Michael N. Kennedy

We have started the process.

Brian Lively - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Okay. And then looking forward, and this fits in, I think, with some of the -- with the prior question, at least. If looking out into 2013 with the desire to spend around your cash flow levels, so should we expect continued liquids growth, but the sacrifice would be gas, and so we'll see gas declines, but liquids growth such that the total growth from the company is sort of flattish? Is that the way to think about it?

Michael N. Kennedy

That is the way to think about it, and I would say it's more on an EBITDA and cash flow basis. It's flattish.

Brian Lively - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Okay. And then last for me, what are you guys seeing just given your production into the Mid-Continent area? Can you guys give us just some more macro thoughts on what you're seeing from ethane? Are you guys seeing forced rejection at this point? Just really anything kind of real time.

Michael N. Kennedy

Yes, Brian, we're not seeing ethane rejection right now. We obviously receive Conway prices for that. It was -- we have the ability to choose on a quarterly basis. And for the third quarter, when we looked at it, it was not -- it was neutral whether or not to reject ethane, so we chose not to reject.

Brian Lively - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

So you guys have firm fractionation capacity then?

Michael N. Kennedy

Yes.

Operator

Your next question comes from the line of Pearce Hammond, representing Simmons.

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

The first question is, Mike, you'd mentioned asset sales, couple of hundred million that you're targeting. As you look out to next year and look at your covenant on debt-to-EBITDA, what do you think kind of the minimum amount of asset divestitures you'll need to effect in order to stay within that covenant?

Michael N. Kennedy

There is no minimum, Pearce. Right now, we're at 3.9x total debt-to-EBITDA, with our EBITDA and cash flow forecasted to stabilize. And with our cash flow and CapEx to be at parity going forward, I don't see much deterioration, if any, on that metric. So we're forecasting a similar in 2013, regardless if we're -- of success around asset sales.

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

Great. And then the couple of hundred million that you mentioned, the goal is to get those closed by year end?

Michael N. Kennedy

Over the next several quarters, yes.

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

Okay. And then Pat, obviously, you've been on the board for a while, but you're fresh eyes as an Interim CEO with the company. As you stepped into the role, is it worth kind of throwing all options on the table for shareholder value, which would possibly include hiring a bank for a strategic review?

Patrick R. McDonald

I don't know. I mean, the board is always examining all alternatives. I know that's kind of a trite answer, but we've not come to the point where we're making any sort of strategic alternatives announcement or -- but the board is always looking at different opportunities for the company and to improve its overall position.

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

But is the goal to just go ahead and get a new CEO in place and let him or her set the new direction for the company?

Patrick R. McDonald

I think the direction is generally set off in the right path at the moment with the Eagle Ford and the Panhandle. Those are 2 very high-quality assets. And we believe that a new CEO would quite readily recognize the value of putting the company's capital and resources to work to develop those assets.

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

Great. And then just one more from me. What is the company's base decline currently?

Michael N. Kennedy

Somewhere between 30% and 35%.

Operator

Your next question comes from the line of Michael Hall, representing Robert W. Baird.

Michael A. Hall - Robert W. Baird & Co. Incorporated, Research Division

I guess just going down the CEO line of questioning a little further. Are there any kind of internal thoughts as it relates to, let's say, kind of qualitative background from candidates, i.e., public versus private backgrounds or more kind of acquire and exploit versus more exploration-type thinkers? Any color around that?

Patrick R. McDonald

I don't think we're bound by any of those categories. There are lots of high-quality people that come from a very diverse background. But all of the attributes that you just mentioned are on the checklist, right? I mean, that's how you grow value in an E&P company, by having that sort of experience and orientation.

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

Okay, so not actually one bias -- biased one way or the other from the board level?

Patrick R. McDonald

Correct.

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

Okay. And I guess the other one on my end, just curious on Pearsall, have you at all looked at prospectivity or evaluated that around the Eagle Ford block?

Patrick R. McDonald

We know it exists. So we're in the process of evaluating it.

Michael N. Kennedy

Yes.

Operator

Your next question comes from the line of Duane Grubert, representing Susquehanna.

Duane Grubert - Susquehanna Financial Group, LLLP, Research Division

Kind of on the same line and thinking through what kind of a CEO are you guys looking for, you mentioned, Pat, that you were impressed by the quality, the assets and the personnel. Is there anything you're surprised by as a particular opportunity that might lend itself to a specific skill set that a CEO might bring?

Patrick R. McDonald

Not particularly, but when you're talking about executing on a base of assets where you're applying capital in the most efficient manner, you look for somebody that has that type of experience. And right now, we've been dealt a pretty good hand of cards, and so we've got to figure out a way to get the biggest, the greatest level of capital efficiency.

Duane Grubert - Susquehanna Financial Group, LLLP, Research Division

And in terms of how you are stabilizing the message internally with the troops, for example, the Permian step was brought in not that long ago as something to look at, and now it's firmly in the camp of being noncore. How do explain that internally? And have you done anything in terms of retention or other changes culturally to kind of stabilize during this period of change?

Patrick R. McDonald

Part of the way that you grow a company is to have assets for the future, and I think that's what the new ventures group was set up to do. But the also reality of it is, as Mike observed, we only have so much capital to go around. So we have to choose -- we have to properly prioritize the uses of that capital. And we have not seen any significant losses of good-quality technical people, and I hope everybody feels comfortable in their job and in their role. And we try to give everybody a chance to do what they do best, which is to find oil and gas and help to grow the company.

Duane Grubert - Susquehanna Financial Group, LLLP, Research Division

And along those lines, you've had this unique opportunity of really getting under the hood in a short period of time. How would you succinctly define what you guys are good at?

Patrick R. McDonald

I'm impressed with the level of technical and operational capability, and I'm also impressed with just the overall process of running a company of this size. It's a very well-organized company, and I'm impressed with the systems and the processes that are in place. But I'm especially excited about the level of technical competence and forward-thinking ideas on finding oil and drilling and completing and maximizing the use of capital.

Operator

Your next question comes from the line of Omar Jama [ph], representing RDL Capital [ph].

Unknown Analyst

It sounds like you guys are looking at a very incremental step in selling assets to generate liquidity, I presume to -- primarily to reduce debt. But it seems clear that something a little more significant is really called for. I mean, you have several high-quality assets and people, in fact, to drill a lot of new prospects. So it seems like something more significant is really called for. So what would it take or what has to happen for you guys to realize that you need to sell more assets, like you need to let one of your core assets go or even consider selling the whole company? I mean, what has to happen for you guys to basically see that or come to that view?

Michael N. Kennedy

Well, Omar [ph], I think we are looking at selling more than just a couple of hundred million. It's just going to take some more time to get the balance sheet back in shape. So I think it's more than you alluded to. I just think it's going to take some time to get the flexibility back in the balance sheet. And the one good thing about Forest Oil's being around 100 years, you have a lot of legacy assets that may not be core. So anything outside of the Panhandle, East Texas, North Louisiana or Eagle Ford is going to get a hard look. So we do have the quality assets and enough of them to get the capitalization, the balance sheet back in order and that's what we're going to do, and it will allow us to exploit in the meantime our oil zones in the Panhandle and the Eagle Ford. And if we do get some gas improvement, maybe get back in the East Texas, North Louisiana area.

Unknown Analyst

Okay, that's helpful. So once the $200 million or $300 million in asset sales get done, can you help us understand what's the next step? Let's think 2 moves down the road.

Michael N. Kennedy

Yes, the next step would be to look at assets that we're currently not deploying capital that may be more, better developed by someone else, and thus, they would be able to pay a fairly good price for it, and we'd be able to redeploy that capital in our Panhandle or Eagle Ford areas.

Unknown Analyst

Okay. And then my final question, on the balance sheet, you guys do have a bond maturity coming up in a couple of years. And so what would be -- would the thought be to retire that or refinance that? Or have you guys not necessarily -- you're not worried about that right now. Can you give your view on that?

Michael N. Kennedy

I mean, it's 18 months out, and it's a bullet, so I don't have much flexibility around it. But obviously, we look at our capital structure on a daily basis. Right now, the option would be to refinance it. If we are successful in the asset sales and get some good prices for it, then it could be, whether a refinance or use partial or credit facility, we don't -- we haven't determined yet.

Unknown Analyst

Okay. I think you guys are doing the best that you can, given what -- the hand that you've been dealt. But it seems like the company might end up being worth more to somebody else than it is to you guys. And that's just a comment.

Operator

Your next question comes from the line of Biju Perincheril, representing Jefferies.

Biju Z. Perincheril - Jefferies & Company, Inc., Research Division

Going to the Eagle Ford acreage. Can you talk about how much of that, the central fairway area that you talked about, has been derisked at this point? And the last 4 or so wells, how far apart are they?

Michael N. Kennedy

I'd say all 40,000 has been pretty fairly derisked, Biju. That's why we picked it. And those 4 wells are pretty close together, but they're not offsets. They -- obviously, every well we're drilling is holding some sort of unit. But they're not far apart.

Patrick R. McDonald

I'd tell you, the key point there is they're all completed in the same zone and in the same fashion, which ties them together in our minds as a proof of concept on that core 40,000-acre block.

Biju Z. Perincheril - Jefferies & Company, Inc., Research Division

Okay. So it's not these recent 4 wells derisked in that 40,000 acres. It's some of your prior drilling, just going into it as well?

Michael N. Kennedy

Yes. I mean, we've got over 20 wells in there. So we've obviously taken into account all those wells.

Biju Z. Perincheril - Jefferies & Company, Inc., Research Division

Got it. And then how many more wells do you need to drill to HBP all that acreage?

Michael N. Kennedy

So of the 40,000, I think, 640 is a pretty good spacing unit on that, Biju. So if you divide 40,000 by 640, that's how many it's going to take? Because we've already done 22 of them.

Biju Z. Perincheril - Jefferies & Company, Inc., Research Division

Okay. And then if you're running 2 rigs in -- the current program, basically 2 rigs in the Eagle Ford and 2 rigs in the Panhandle. On that program, can we expect oil volumes to show the kind of growth that you are forecasting in the back half of this year to continue into 2013 or is there a...

Michael N. Kennedy

Yes, yes. I would hope so.

Biju Z. Perincheril - Jefferies & Company, Inc., Research Division

And then one last question for me. On the balance sheet, Mike, are you comfortable with the, I don't know, the key metric that you look at, debt-to-EBITDA, that 3.9x moving any higher from here depending on the timing of asset sales and what have you that's in the covenants at 4.5x?

Michael N. Kennedy

Yes, I'm comfortable with it. I mean, I am for -- without asset sales, I think by year end, we'll be at 4x, because we are going to have little bit of overspend as we lay down rigs from here. But I don't forecast it going much above 4x. And so that's comfortable to me.

Operator

Your next question comes from the line of Dan McSpirit, representing BMO Capital Markets.

Dan McSpirit - BMO Capital Markets U.S.

Could you provide us with an update on the plan to monetize the 60,000 net acres in the Eagle Ford you don't plan to hold? That is, is there a formal process underway? Or is this just simply a continuation of the JV process? Should we expect it to be monetized in maybe one or more packages? And any thoughts on valuation would be appreciated as well.

Michael N. Kennedy

Sure. No, that's ongoing. We're looking at those acres. The ones to the south, we'll probably seek out a JV or divestiture, and that's ongoing. A JV in small chunks, more like your typical farm-out. So we're looking at a couple of thousand acres here, a couple of thousand acres there. So...

Patrick R. McDonald

And that's an internal process that's very much underway. And I think you should think in terms of one or more packages, but...

Michael N. Kennedy

Absolutely.

Dan McSpirit - BMO Capital Markets U.S.

Okay, got it. And one more question on the CEO topic, recognizing that you've engaged the search firm and that search is still underway. Any thoughts on timing, that is, will we be speaking to a new CEO, say, third quarter earnings call? And what does this mean for a COO?

Patrick R. McDonald

Understand [ph] that as you might imagine, it's impossible to predict the timeline of such an effort. But what we can say now is Spencer Stuart and the board are fully engaged, the process is ongoing and something happens not every day, but definitely a couple of times a week on that effort. I can't comment on the Chief Operating Officer. We don't have one today. I would think that decision will be left to the new -- the board and the new CEO and his or her thoughts about going forward.

Operator

Your next question comes from the line of James Pfeiffer [ph], representing Wells Fargo.

Unknown Analyst

When you say that you've reduced CapEx for the second half of the year, I'm just curious as to what the original level of spending you had forecast and which projects you specifically decided to cut.

Michael N. Kennedy

Yes, James. No, it's actually within our original guidance. It was always the schedule to have it be front-end loaded. Announcing the second half, that was really just confirmatory that we are indeed going to reduce the capital.

Unknown Analyst

Okay, that's helpful. And then secondly, of the remaining 60,000 acres in the Eagle Ford, approximately how many do you think would be subject to additional monetization or that you could potentially monetize?

Michael N. Kennedy

Well, I'd hope all, but I doubt that's the case. I would think the stuff to the south within round numbers, around 20,000 acres, is the more prospective of the acreage.

Operator

Your next question comes from the line of Brad Evans, representing Heartland.

Bradford Alan Evans - Heartland Advisors, Inc.

Just curious, did the board sign off on the company's entry into the Permian Basin?

Patrick R. McDonald

Yes.

Bradford Alan Evans - Heartland Advisors, Inc.

I guess I'm just having a hard time understanding just why it's in shareholders' best interest to go down a more piecemeal path to deleveraging the balance sheet when we've seen with the Eagle Ford JV transaction that we put our ducks -- our eggs in one basket, so to speak. And it looks like that has come up empty. So I'm just -- I'm having a hard time understanding why it's not in shareholders' best interest to -- and look, I realize that it can cause stress across the organization from an employee perspective, but I'm thinking now as a shareholder, putting shareholders kind of at the front of the bus. Why is it not in shareholders' best interest to bring in an investment bank and really pursue all alternatives for the company?

Patrick R. McDonald

I think the best way to realize value out from the Eagle Ford and the Permian is, one from the Eagle Ford, Brad, is to develop and show these consistent results that we're having. I mean, the last 6 or 7 wells has really been the start of the central fairway program. And so in order to realize value out of that, you need a little bit of time and some more wells. And now the Permian sale, I think we'll be able to get most if not all of our capital back out of that. That will be a different process. And the Eagle Ford will actually be a sale where the Eagle Ford was a pretty highly structured JV. So in order to get money from the Permian, which I don't think you would get right now from a strategic alternative purpose, we thought it would be best to go out and actually monetize that asset.

Bradford Alan Evans - Heartland Advisors, Inc.

Well, just a comment as I think -- I realize it's a tough environment for all, for the industry and for Forest in particular, but -- and it's been a pretty brutal experience for shareholders, and I think confidence in the board is very low. And some of the decisions made rest at their feet. So I think shareholders deserve all options put on table.

Operator

Your next question comes from the line of Jonathan Go [ph], representing Millennium.

Unknown Analyst

All my questions have been answered.

Operator

Your next question comes from the line of John Hurlan [ph], representing First Oil.

Unknown Analyst

Will you stay in the rig business? Will you keep the lantern rigs going? That's all.

Patrick R. McDonald

Yes, we will. The ones that we -- are not working for us, we'll try to contract out, John.

Operator

Your next question comes from the line of Gregg Brody, representing JPMorgan.

Gregg Brody - JP Morgan Chase & Co, Research Division

Most of my questions has been asked. Just 2 for you. The other asset sales, is -- I believe, does that include the midstream as well as the foreign assets?

Patrick R. McDonald

It does.

Michael N. Kennedy

Yes.

Gregg Brody - JP Morgan Chase & Co, Research Division

And then just some color. It doesn't -- I'm just curious what your -- you've said in the past, your revolvers -- you've pointed out you have a lot of room under it. What are you seeing from the banks in terms of borrowing base redeterminations as to price decks they're talking about? And do you think that impacts your borrowing base at all?

Michael N. Kennedy

Yes, the redetermination season really hasn't started yet, so we haven't really seen any update to their pricing or any other deals that have given a good indication of where borrowing bases are going. I think with the improvement in gas prices and with still-robust oil environment, I don't see much deterioration in the pricing they use. So it's yet to be determined.

Operator

Your next question comes from the line of Peter Brotchie, representing Union Trust.

Peter Brotchie

Pat, you had mentioned you were surprised by the quality of the assets. You had a JV process open for what seems like about 1 year or so. The previous CEO had gone as far as to say he would also entertain an outright sale of the acreage. Can you just speak to your perspective on why you were not able to get a transaction done there?

Patrick R. McDonald

I wouldn't say I was surprised by the quality of the assets. I just didn't have the level of understanding. I'm a geologist by background and training, so once I was able to get in and really kind of look at some of the technical data, I was impressed with the new program to drill and complete wells. We did -- we have offers for the Eagle Ford joint venture concepts which just didn't meet our expectation of value. We didn't think that they were -- would allow us to fully develop the asset, and so we've decided to embark on our own program of putting 2 rigs to work there.

Operator

Your next question comes from the line of Scott Hanold, representing RBC Capital Markets.

Scott Hanold - RBC Capital Markets, LLC, Research Division

Looking at what you guys are look -- the assets you're looking to stick with versus potentially monetize, it sounds like East Texas, Northwest Louisiana is something that stays within Forest, or at least the plan for now is. Is that in part because a lot of that is HBP'd offers [ph]?

Michael N. Kennedy

Yes.

Scott Hanold - RBC Capital Markets, LLC, Research Division

Okay, so it is. And then with that acreage there, obviously there are some folks, I guess like Anadarko, have been talking about some potential liquids, Haynesville and even some better Cotton Valley horizontal performance. Is that something that you've looked at extensively? Or is that something you could do more going forward?

Michael N. Kennedy

That's what we're doing right now. So that's -- out of the 5 rigs I'll have running in the fourth quarter, 1 of them will be dedicated to that. So we do recognize that potential and find it attractive. So we are trying to exploit that.

Scott Hanold - RBC Capital Markets, LLC, Research Division

Okay. Have you completed a well yet? I'm sorry, did -- if you said that or...

Michael N. Kennedy

Yes. I think in our press release, we had 4 in this past quarter. I think our first one was in November, December of last year. So we're probably up to about 7. They've all averaged around 8 million to 10 million a day with 40% of the hydrocarbons being liquids.

Scott Hanold - RBC Capital Markets, LLC, Research Division

Okay. And I guess my question is, were those Haynesville wells or were those Cotton Valley wells?

Michael N. Kennedy

Cotton Valley.

Patrick R. McDonald

Cotton Valley.

Scott Hanold - RBC Capital Markets, LLC, Research Division

Okay. And I guess I'm just more specifically looking at the Haynesville. Do you have any of the liquids Haynesville potential there?

Michael N. Kennedy

We saw that from Anadarko's Analyst Conference. We're still evaluating that and looking across our acreage. We don't know if it's a nomenclature issue or not, so we're still analyzing that.

Operator

Your next question comes from the line of Brian Velie, representing CapitalOne Southcoast.

Brian T. Velie - Capital One Southcoast, Inc., Research Division

Quick question, just kind of piggybacking on the last one about the East Texas, Cotton Valley wells. The first 7 coming in at 40% liquids, I was kind of under the impression that maybe as a whole, the liquids percentage might be a little bit lower. But at 40% what kind of inventory do you think you have in front of you where you could keep drilling them at that level of liquid?

Michael N. Kennedy

I think we have around 15,000 to 20,000 acres, just specifically in that Rusk, Panola County area. We're obviously still evaluating across our entire 160,000-acre position, but that's the first place we've identified it. So we have significant locations remaining. And with 1 rig, you get about probably 6 to 7 wells a year. So we're not, in any sort of way, running out of locations.

Brian T. Velie - Capital One Southcoast, Inc., Research Division

Okay, great. That's very helpful. And what's the spacing on that 15,000 to 20,000 acres?

Michael N. Kennedy

Probably 100-acre spacing.

Operator

Your next question comes from the line of Joe Magner, representing Macquarie.

Joseph Patrick Magner - Macquarie Research

Cost [ph] about growth in 2013 mirroring the trajectory here in 2012 on the oil side. Have you thought at all what the production mix might look like, and how that might trend throughout the year?

Michael N. Kennedy

We haven't done -- we're in the middle of the budgeting process, Joe, for 2013. So we haven't come up with those numbers yet. But just looking at our trajectory this year, it should be somewhat sustainable, but I don't have final numbers.

Joseph Patrick Magner - Macquarie Research

Okay. And then pursuant to comments in the release about the exposure to potential ceiling test write-downs in the third quarter. Any thoughts about actual reserve impacts when year-end reserves are determined?

Patrick R. McDonald

Yes, we haven't done that. As you know, the ceiling test write-down is purely a formulaic calculation. It doesn't really affect reserves. So when we get our third-party engineers in to do the final year-end audit, when D&M gets in here and we have some have more clarity on pricing, we'll know that number better.

Joseph Patrick Magner - Macquarie Research

Okay. And also the ceiling tests do not have an impact on the borrowing base calculation. Is that correct?

Michael N. Kennedy

That's correct.

Operator

Your next question comes from the line of David Tameron, representing Wells Fargo.

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

Pat, you've referred to the fact you got -- you said you got some offers for Eagle Ford acreage, but it wasn't -- they weren't -- they didn't meet the threshold you had internally. Are you talking on a per acre basis? Or are you talking -- or it was more structure of...

Patrick R. McDonald

More about the structure and the way the asset might get developed.

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

Does that -- would the implication be that it was a financial -- an offer from a financial partner? Am I thinking about that right?

Patrick R. McDonald

I don't know. Maybe the implication [indiscernible]. Can't really answer that, David.

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

All right, fair enough. In the Eagle Ford, you might have said this, but remind me, your HBP, the 40,000 acres, what's the time frame on that? When do you have to get that done?

Michael N. Kennedy

It's over the next 3 years. Not much in 2012. The majority of it's in '13, and then there's a minority in '14 and '15.

Patrick R. McDonald

The 2-rig program is designed to hold that entire acreage block.

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

Okay. If you were to get an additional $100 million slug to spend next year, where would with that capital go?

Michael N. Kennedy

Go to pay down debt.

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

All right, fair enough. And last question, you guys talked about the Eagle Ford, Granite Wash, East Texas, Haynesville being kind of the core assets. Would you consider selling any piece of those?

Michael N. Kennedy

I mean, never say never, right? So, of course, we'd consider it. But it's not what we're focused on. We're focused on non-PDP assets first and then any assets as not -- leaving [ph] capital second.

Operator

You have a follow-up question from the line of Pearce Hammond, representing Simmons.

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

Michael, just curious, I know it takes time to get there, but where would you like to target the debt-to-EBITDA ratio to be eventually for the company? What would you define as optimal?

Michael N. Kennedy

Optimal, where we've lived in the past and have been comfortable with, the real metric we look at, Pearce, is debt per PD reserves. And on a 15:1 basis, for oil, we'd like that to be $1.25 or below.

Operator

You have a question from the line of Joe Lu, representing MAST Capital.

Joe Lu

Michael, just a quick question on the 2014 maturity. Would you -- would the availability of using the revolver to pay down that maturity be on the table?

Michael N. Kennedy

Yes, of course, that's on the table. It's not a preferable option, but we do have room there, Joe. And if that's what's required to redeem those notes, then that's what we'll do.

Operator

You have a follow-up question from the line of Michael Hall, representing Robert W. Baird.

Michael A. Hall - Robert W. Baird & Co. Incorporated, Research Division

I just wanted to, I guess, circle up, fine-tune my accounting, if you will, a little bit on the ceiling test write-downs. Could you talk about the impacts of those on the DD&A rate and how that plays through on a go-forward basis? And maybe what do you expect that rate to look like for the rest of the year?

Michael N. Kennedy

Yes, Rob. We originally, we anticipated this first one, Michael, so it was already captured in our DD&A guidance. The second one, which will be more sponsored by NGL prices, was not anticipated. But at this time, because of the uncertainty around what the ultimate price we're going to use, we didn't put -- change guidance. But the third quarter one will most likely lower our DD&A guidance.

Michael A. Hall - Robert W. Baird & Co. Incorporated, Research Division

Can you put any, let's say, bands around the magnitude on the write-down itself and/or the impact on DD&A?

Michael N. Kennedy

Yes. Right now, if things hold up, we're looking at a similar write-down to the one we had this quarter.

Michael A. Hall - Robert W. Baird & Co. Incorporated, Research Division

And the impact on DD&A is?

Michael N. Kennedy

Yes, when you divide that by -- if you look in the total full cost pool, if you have $300 million further reduction over our reserves, I mean, probably looking at $0.20.

Operator

You have a follow-up question from the line of Omar Jama [ph], representing RDL Capital.

Unknown Analyst

So asking the Eagle Ford question in a different way, so you did have some interest in actual offers. But looking at, for instance, the Comstock deal, which was announced here this week, it looked like they were only going to get 10% or 15% of their wells paid for by KKR. And so was it that type of a deal that you passed on? Or was it a better deal than that, or something similar to that?

Patrick R. McDonald

I don't know that we can characterize the offer -- offers if we've received any expressions of interest. So I don't really think it's helpful for us to try to say what they were or what they weren't.

Unknown Analyst

Okay, I understand. I don't -- you obviously don't want to hurt the company, even if investors are curious about that. And then another question I had is, if you guys have received any formal or informal overtures to acquire the company over the last year or 2?

Michael N. Kennedy

We can't speak to that, Omar.

Operator

Your next question comes from the line of Cody Campbell, representing Double Eagle Development.

Cody Campbell

Following up on an earlier question that was asked, your shareholders have lost a lot of value over the last few months, and I guess your plan to -- as you stated, in order to regain that shareholder value, is basically to drill good wells and continue drilling good wells. And I guess my question relates to the fact that the last 2 quarters [indiscernible] wells in the Hogshooter and in the Eagle Ford, but yet your stock price continues to decline. Why do you -- continuing to announce your wells are going to -- is going to help realize or help your shareholders regain the value that they've lost?

Michael N. Kennedy

I think, Cody, a lot of that value has been lost in the disconnect between the capital expenditures and the cash flow, which is going to be rectified in the second half. Also the focus on the new version of the Eagle Fords in the central fairway should improve results there. And you couple that with the delevering in the balance sheet, you would expect further improvement in the stock price.

Cody Campbell

Well, and I'm just kind of wondering what it hurts to, as a previous caller suggested, hire an investment bank to pursue some strategic alternatives and a bigger deal, possibly, that could allow you to either sell the company or develop some assets that you're going to basically divest. I mean, you have good stuff in the Permian. Why wouldn't you want to try to make a deal to develop it?

Patrick R. McDonald

Well, that's on the table with the concept of perhaps a partner to help develop some or all of these assets. I think that's just what we need to do to develop the resource base that exists within this company.

Cody Campbell

But you say you're not going to hire any kind of outside help to pursue those alternatives? You're just going to kind of see what comes to you?

Patrick R. McDonald

No, I don't think we're saying that. For the asset packages, there will be -- some of the packages will be handled by agents...

Patrick R. McDonald

Well, I'm not talking the divestitures. I'm talking about like joint ventures or larger deals that involve something [indiscernible] company [ph] as a whole.

Patrick R. McDonald

Sure. I think -- well, I don't know, not speaking for the company as a whole, but for some of these more expansive concepts, I don't think that's something we would attempt to [indiscernible]...

Cody Campbell

Okay. And then, well, I guess, why not?

Patrick R. McDonald

Attempt to do it internally?

Cody Campbell

Yes, what's the downside to getting somebody to help you or actively pursue those alternatives?

Michael N. Kennedy

Well, when we looked at it, we thought the best way to increase shareholder value was to get a CEO in place. And if you run around [ph] those processes, I doubt a CEO would be very attracted to come join Forest.

Cody Campbell

So the answer to the earlier question was you guys are waiting for the new CEO to pursue those alternatives and whether they want to do them.

Patrick R. McDonald

Well, I don't know. That would imply that the company is standing still, which is not the case at all. We're making a lot of important decisions here every day, Cody. So I know you know that, and I'm not sure what your real question is, but...

Cody Campbell

My real question is just why you guys aren't doing more than you're doing. I mean, your stock has gone down 50% since April. And what you're doing is -- you're not changing your capital plan from what was previously announced. You're not really doing anything new. Your Eagle Ford deal didn't work, so what are we going to do now? We need -- obviously, we need something that's more expansive in scope than what you guys have proposed. And I just don't see you making any steps to try to pursue those alternatives.

Michael N. Kennedy

I think getting the capital and cash flow in balance and exploring other assets sales to delever the balance sheet is a lot of actions. And if we're successful on that, I think you'll see the appropriate response to the valuation.

Cody Campbell

And I totally agree with you in what you say that the company is not on fire. It's not going to go under. You can continue to sustain what you've been doing by taking those small steps, but if we're going to regain the share price that's been lost, we have to do something bigger than what you're talking have planned [ph]. And that's just my comment. And I guess to that point, you have a board seat that's open with Craig leaving. And when do you plan on filling that? And do you plan on putting a shareholder -- more of a shareholder representative in that seat?

Michael N. Kennedy

We can't comment on board matters.

Operator

At this time, I would like to turn the call over to Mr. Larry Busnardo for closing remarks.

Larry C. Busnardo

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

Operator

Thank you for your participation in today's call. This concludes the presentation. You may now disconnect, and have a great day.

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