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Forest Oil Corp. (NYSE:FST)

Q2 FY08 Earnings Call

August 6, 2008, 02:00 PM ET

Executives

Michael N. Kennedy - VP of Finance and Treasurer

David H. Keyte - EVP and CFO

H. Craig Clark - President and CEO

J. C. Ridens - EVP and COO

Analysts

Tom Gardner - Simmons & Co.

Kent Green - Boston American Asset management

Gil Yang - Citigroup

Brian Singer - Goldman Sachs & Co.

Andrew Coleman - UBS

Biju Perincheril - Jefferies & Co.

David R. Tameron - Wachovia Securities

Jeffrey W. Robertson - Lehman Brothers

Dan Mcspirit - BMO Capital Markets

Operator

Good afternoon. My name is Nicole, and I will be your conference operator today. At this time, I would like to welcome everyone to the Forest Oil Second Quarter 2008 Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. Thank you.

Mr. Michael Kennedy, you may began your conference.

Michael N. Kennedy - Vice President of Finance and Treasurer

Good morning. I want to thank you for participating in our second quarter 2008 earning conference Call. We have joining us today Craig Clark, President and CEO; Dave Keyte, Executive Vice President and CFO; and J.C. Ridens, Executive Vice President and COO.

I would 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, or anticipates and other similar expressions about what will, should, or may occur in the future are forward-looking statements. Please carefully review our cautionary language regarding forward-looking statements that is contained at the end of our press release.

I will now turn the call over to Dave Keyte. Thank you.

David H. Keyte - Executive Vice President and Chief Financial Officer

Thanks Mike. Good morning and thanks to all for listening from steamy Denver where we just recorded our 24th straight day of over 90 degrees breaking the previous mark of 18 days and gas is being used.

The second quarter results were largely inline with expectations. Predicted sales volumes, increases of almost 6% sequentially coupled with higher oil and gas prices and a remarkable cost control to lead our record results. New records were established with adjusted EBITDA of $377 million, discretionary cash flow of $344 million or $3.92 per share, and adjusted earnings of $135 million or $1.54 per share.

The third record...the third quarter is of to a good start as well, although recent weakening in commodity prices may prevent new records from being established. We'll see.

In the second quarter, we produced 505 million equivalents per day, up almost 6% sequentially and up 31% from a year ago. Please note, the 31% increase is without issuing any equity of the company and with debt being down over $150 million at June 30 of '08 versus June 30 of '07. So we had a 31% increase in production while paying down over $150 million in debt with no equity issuances. I'll stack that performance up against anybody.

As has become the norm, increased cash margins led the way in achieving our record results. The drivers here were a 55% increase in revenue per Mcfe to $11.21 and a 17% decrease in cash costs to $2.47 level, compared to the corresponding period of 2007. This combined to generate cash margins of $8.47 per unit in '08 versus $4.26 in '07 or over a 100% year-over-year increase in our cash margin for the quarter.

The overall per unit cash cost decrease this quarter was led by reductions in lease operating expense, which decreased 35% from $1.29 per unit last year to $0.84 this year. We continue to generate exceptional cost results in the toughest of environments. This is a critical attribute for a company to have when your business is resource plays. This business can often have more economic challenges than technical challenges and cost control can mean a difference between being able to make money or not, in a low commodity price environment.

Our DD&A rate increased slightly to $2.76 as we increased our estimate of future development costs, due to recent cost increases experienced in tubulars, diesel and equipment. We increased our estimate of current tax expense to let the cash tax due to strong prices possibly making us a tax payer in Canada this year. We are pretty much on the bubble as to being taxable in Canada, so future prices will determine our fate there. We do not believe we'll be a U.S. tax payer in the near term even with our planned asset sales.

We added a couple of hedges during the quarter to correspond with our Ark-La-Tex acquisition in May, our overall gas hedge position is about 118 million a day hedged in '08, and 150 million a day hedged in '09. The price, floor, and ceiling range is $8 to $9 in '08 and $9 to $10 in '09. Mark-to-market loss as of yesterday was about $200 million versus $525 million at June 30th.

Turning our attention to our plan, we indicated in April that we would increase our capital spending in order to increase the net asset value of our large drilling inventory. The result of that was an increase in our projected organic growth rate to about 15% then planning to spend a 110% of cash flow. As you can see, the predicted results are coming in as we increased production almost 6% sequentially, spending $294 million or 85% of cash flow in the second quarter.

We continue to build our capital spend rate and will need to increase that burn rate to about $325 million per quarter to achieve our CapEx target. For the remainder of the year, we maintain our view on organic growth. We will be impacted by property sales and in fact have already closed on $52 million of asset sales with production of about 4 million to 5 million a day. Therefore, we maintained our original fourth quarter goal of 545 million to 560 million a day and adjusted it for $5 million a day of property sales that have already occurred.

Our larger, Permian and Rockies sales packages should close about the end of the third quarter. We will announce further adjustments when these sales occur.

Finally, some comments on our current valuation. I know the sector rotation has been extreme in the last five weeks. However, Forests' trading multiples are now at modern lows. We are currently trading at less than 4.5 times enterprise value to EBITDA and less than 3.5 times cash flow. This is for a company that did the following this quarter. Grew production by almost 6% sequentially with 10% of that growth in the core, spend 85% of the cash flow on the drillbit to deliver that kind of organic growth, grew production 31% year-over-year while decreasing debt and not issuing equity, decreased cash cost 17% year-over-year.

During the second quarter, we announced very large positions in two exciting North American shale plays with pilot wells currently drilling. We continue to build a deep inventory of vertical and horizontal wells in East Texas Buffalo and in Canada. We have exploratory exposure in very perspective areas including Hailey, South Louisiana, South Texas, and Deep Austin Chalk. All of these attributes form a company with excellent growth in its core business and I might say, importantly per share and debt adjusted per share growth, significant potential catalyst events and we have a very a disciplined approach to stewarding our investors' money.

Simply put, this company has the best core business, the largest inventory prospects, and the most solid financial footing in its history and is trading at modern low multiples. I encourage all to consider this and consider beefing up their position enforced when investor sediments improves, and the sector recovers. Craig?

H. Craig Clark - President and Chief Executive Officer

Thanks, Dave. We'll do it a little bit out of order today, I'll go before J.C.

The second quarter was as predicted with more records achieved, but unlike some competitors, the financial records were not achieved solely from increased commodity prices but also from what we're supposed to be doing for a living, and that's increasing production and controlling cost. It's great this company exercises spending discipline while not being victimized by cost complacency.

Our records are getting to be habit as we seem to achieve some sort of record each quarter. More importantly, the production record was achieved from our major focus areas. As noted in the press release and Dave noted, the focus, the major focus areas that are sequentially increase in net production of a whopping 10%. And this happened before we get to the exploration projects or other shale upsides. Obviously, our core business is just as good as any in our space.

Again, this quarter, we had competitor activity near our acreage which added or validated more vertical or horizontal successes, particularly with our hands with shale positions. We also added horizontal success in our Arkoma Basin along with more successful Cotton Valley wells in East Texas that are horizontal which continued to exceed our original expectations. J.C. will cover these new tests following me.

We have initiated a horizontal program in the Alberta Deep Basin which follows our successful Alberta EVO field, horizontal success last quarter. Again, this quarter we added an acquisition, small acquisition but with large acreage in East Texas and North Louisiana which significantly increased our acreage position including rights in the Haynesville.

We added acreage in the core focus areas through leasing as well; in fact we added it in our four North American business units. We have updated the road show slides to show the number of identified locations and unrisk reserve potential which is now up to 15 Tcf in over 17,000 locations. No additional downspacing on the other assets were assumed in this update. Clearly, these assets are not mature in term of Forest ownership and therefore in terms of upside exploitation.

Another quarter of building on to this portfolio from simply two types of rocks; tight gas sand and shales. I hope folks can appreciate the science, the logic and the economics that we employ in this inventory. I am not going to compare these assets to other competitors, but just show our numbers and metrics we use, much of which we've talked about before. We even broke out the economic sensitivities at various gas prices in this inventory, when we did it nobody cared about gas price at our analyst conference in April.

Although I am not predicting $6 gas, we tested these economics at $6 per MMBtu NYMEX gas. Our natural hedge is our superior commercial results that Dave alluded to, that is the economics cost control, tax position in addition to the commodity pricage themselves. Folks you have come to expect discipline and science from us.

The second quarter could be summarized as right on track, right on schedule. By this, I not only mean the numbers on production cost, CapEx spending, but in terms of the entire '08 plan we released earlier this year.

Also on schedule are things like the closing of the Ark-La-Tex acquisition and the immediate take over of operations. Also, the 2008 divestiture program, we have two data rooms currently running simultaneously and as Dave mentioned we sold a few properties even early.

Our ramp up in the rig count, one of the majors focus areas, and J.C. will go into the individual rigs. This includes our expansion of the horizontal program in tight gas sands following the great success in East Texas.

Our high impact exploratory projects are on to the track we described in South Louisiana, South Texas, and the Deep Haley in the Permian Basin. Last but not least, our Utica and Haynesville pilot shale programs are proceeding according to the schedules we earlier detailed. J.C. Ridens will cover these individual highlights, but before that I would like to touch on overall industry trends and conditions.

As Dave mentioned, our second quarter net production was up 6% sequentially, it's looking right on track. On the cost side, let's first talk about operating cost. I can say again good job to our folks. The costs were down 17%, cash cost from a year ago and LOE was down 19% from the same period. Folks, we see the same cost pressures as competitors and again this quarter we stand apart from our good performance.

Remember, we started 2008 by guiding flat cost, or cost control and then we go out and did it. We didn't raise the guidance and then lowered, we guided flat. We are seeing the same cost pressures at this point during '08, most of the operating cost type pressures coming from fuel, diesel for instance, compression and now petroleum-based treating chemicals or additives. We see the same pressures in Canada, but less than in the U.S. The key to our focus program is segregating each major item and working to beat them down.

In terms of capital spending, we spend $294 million in the second quarter on E&P activity, $547 million year-to-date. The annualized first quarter CapEx spend was the all guidance and accordingly in our disciplined fashion, the second quarter CapEx been raised was close to the revised guidance we announced in March. We drilled 234 wells year-to-date at 97% success rate.

I should also comment about the current... the industry cost trends in terms of drilling costs. When we increased our capital gains back in March, we said we added amounts expected for pipe and rig rate increases. Pipe prices have certainly increased, doubling in only four months. I am not to sure all of this was justified. Pipe availability, particularly alloy may hinder further rig count activity in the industry. We have averted storage at Forest where our annual pipe purchase program and the use of alternative sizes, grades ERW versus same length et cetera. We see some increases also in what I would call, bulk commodities like frac cropping, day rate [ph] and cement.

Our 2008 discount program help us lock in discounts through the end of '08. Onshore day rates are slowly creeping up as we talked about. Rig demand onshore in particular and utilization is high and as we know particularly for rigs used in horizontal activity. While our success in the horizontal tight gas, our Haynesville acreage percentage which will be horizontal and our deep Buffalo Wallow offsets which have been successful, we have now commissioned four new 1500 horsepower rigs to be built for our drilling subsidiary fleet. This will bring the lantern fleet the 15 rigs and is consistent with our goal to own approximately half our rigs in the lower 48.

The first rig will come out in November, second December, the last two in the first quarter of '09 on Forest properties. Before I turn it over to J.C., I hope investors appreciate the value we've created. Certainly, the low cost of entry, the acquisitions along with the extensive inventory that we have demonstrated that we can put into production in other words the tanks for the pipeline. So in this value is not reflected in our current stock price. You will also see from JC's operations comment that our execution is going according to plan with some great horizontal results particularly in East Texas. J.C.?

J. C. Ridens - Executive Vice President and Chief Operating Officer

Thanks, Craig. Kicking off from the western business unit, we had another solid quarter recorded for Buffalo Wallow. The increased activity further in this area during the second quarter, adding a seventh rig and eighth rig will be moved to the field in this quarter. A total of 35 wells have been drilled year-to-date with 100% success rate. The initial rates from these wells range from 1.8 to 7.8 million cubic feet equivalent per day with an average of above 4 million cubic feet per day.

Production from the Greater Buffalo Wallow area reached a new record of 55 million cubic feet equivalent per day and our acreage increased in the area to approximately 51,600 acres. We are participating in some horizontal rows in the area and we'll use the data gathered there to further evaluate the applicability of horizontals on our own acreage.

In the Greater Vermejo/Haley area in the Permian Basin we conducted a successful re-entry that's currently being completed. We also started our drilling program on schedule after completion of the seismic evaluation and the first well is expected to reach total depth this month. When this well is finished, we plan to move over and begin the second new drill of our 2008 program.

Moving over to the eastern business unit, with the completion of our bolt-on on acquisition in North Louisiana as well as great organic growth from drilling operations, production from the East Texas area reached a new record of over 76 million cubic feet equivalent per day during the quarter. That's a great growth rate in slightly over two years.

We have had continued success in the horizontal program in the Cotton Valley. During the second quarter, we completed two additional horizontal wells for an average of 5.2 million cubic feet equivalent per day. That brings us up to a total of seven horizontals completed since we started this program. And the average of all seven is about 5 million cubic feet per day for initial rigs. These are outstanding rates from Cotton Valley and in fact are as good as few of the Haynesville shale announced completions.

Speaking of Haynesville, we have continued with an acreage leasing program, adding acreage in what we consider the key part of the play. We dip in two vertical wells to the Haynesville together additional geotechnical data. One of these wells is currently being flow tested. And the second is scheduled to be completed this month. Armed with this data, we still plan on drilling 2 to 3 horizontal wells in the Haynesville in 2008 where our position is in excess of 91,000 net acres.

Our East Texas North Louisiana vertical program continues to deliver good results as well. We had over 25 wells drilled in the quarter with 100% success rate. Initial rates ranged from 1.1 to 4.3 million cubic feet equivalent per day from these wells. The 4.3 million cubic feet per day rate is one of the best verticals we have drilled so far.

In Jewett field, which we acquired in May, we've reduced the drilling times from the previous operator reaching TD in 14 days compared to 19 for them, and completed a Travis Peak well for over 4 million cubic feet equivalent per day, which is significantly better than any of the wells drilled previously.

In total, in East Texas and North Louisiana, we're running 8 rigs, which is up from five rigs in the first quarter. In our Arkoma area, we had peak production of approximately 41 million cubic feet equivalent per day. We drilled a total of 28 barrels here with an 89% success rate and had IPs ranging from 1.1 to 3.9 million cubic feet equivalent pre day from vertical wells.

Horizontal drilling in this area has yielded success as well with initial rates of 4.2 to 7.8 million cubic feet per day being achieved. These are the best rates that we have seen from the horizontal program to-date. Importantly, we've increased our acreage in this area to approximately 70,000 gross acres and drilling activity in the quarter was increased as well by adding a fourth rig.

In conclusion to this business unit, I'd be remised if I didn't mention that a new production record of approximately 23 million cubic feet per day was reached at West White Lake field. This was one of the fields purchased from Unocal in 2003 as our first acquisition under our new four point strategy. The field was producing about 7 million cubic feet equivalent per day at the time of the acquisition.

Through workovers and recompletions initially, and as a result of additional drilling in the last two years, this field has been a tremendous example of our successful acquiring and exploring strategy, and it also happens to be the location for our Deep Delilah prospect which I will cover later.

Moving down to Southern, we have a total of seven rigs running on the South Texas assets currently, which is an increase of two over the last quarter. We drilled 17 wells in the quarter with a 94% success rate, and we achieved initial rates as high as 7.5 million cubic feet per day from our Wilcox program. We also kicked out the Vicksburg joint program at the McAllen Ranch, the first well is drilled, cased, and pending completion. This is the first of our five well drilling program in this field.

Moving up north to Canada. The Deep Basin continues to yield some impressive wells with the second quarter completion resulting in 5 million cubic feet per day, right in the middle of the field at Wild River. Based on this and other results from our England [ph] program, we will proceed with downspacing of Wild River and importantly we kicked our horizontal drilling here as well. We have a horizontal well being drilled at Wild River currently with two more planned of 2008, the first one's targeting one of the upheld zones that we tested and approximately 1 million cubic feet per day in a vertical well bore. Sounds a lot like how we started our Cotton Valley program. We also tested a well at Ansell/Sundance for about 4.5 million cubic feet per day.

Now, for the New Frontier and exploration program. First off in the Utica shale, we are right on our timeline that we showed at our analyst conference. Due to competitive reasons, we won't discuss anything further about this until probably the fourth quarter, but we are executing just as predicted so far.

Our Deep Delilah prospects in Louisiana spud as we have predicted, and we are well on our way to the drilling of this 18,000 foot test. We also spud the first well in our Deep Austin Chalk well during the second quarter, and this well will be drilled as a drill lateral.

Lastly, as I discussed earlier in the Western business unit, our progress of Vermejo/Haley is right on the timeline that we established for it as well and we continue to execute on our New Frontier program as discussed in April and have further added to it was our Haynesville program as well.

In summary, we continue to execute as we said we would not only on our core assets, but also on our New Frontier and exploration programs.

Operator, at this point we'll now open the lines for questions.

Question And Answer

Operator

[Operator Instructions]. Your first question comes from the line of Tom Gardner with Simmons & Co.

Tom Gardner - Simmons & Co.

Good afternoon, gentlemen.

H. Craig Clark - President and Chief Executive Officer

Hi Tom.

Tom Gardner - Simmons & Co.

Hey, regarding the prospectivity of the Haynesville Bossier, you are excluding 22,000 acres of your North Texas... excuse me your East Texas, North Louisiana acreage from the play. Why do you believe... I mean where is this acreage and why do you believe it's not prospective?

H. Craig Clark - President and Chief Executive Officer

We basically, first off if you did not have all the deep rights that would be excluded, but at the shallow. But we, where we have got it listed we have all the rights. And then secondly, we basically... we're not trying to predict the sweat spot, I'm sure that will be debated in months to come. But basically, all the activity East and West of the Texas border, where most of the activity is focused, but most of our acreage was clear on the East Texas side.

Tom Gardner - Simmons & Co.

Okay

H. Craig Clark - President and Chief Executive Officer

Excluded acres would be fringy, I should say fringe but it would either east of it or south of it, in either East Texas or North Louisiana, let me tell you East Texas West.

Tom Gardner - Simmons & Co.

In what counties would that be?

H. Craig Clark - President and Chief Executive Officer

I think in our press release we noted in most of acreage is and Louisiana would be in Red River and I think Desoto and Caddo and in East Texas, most of it's in Harrison, Rusk, Panola

Tom Gardner - Simmons & Co.

Okay. Well, great. Thank you for that, And one other question. Craig, do you view this sort of uncertain time in the commodity environment as in opportunity time perhaps to execute another acquisition? If so, what sort of size deal would your balance sheet allow in your view?

H. Craig Clark - President and Chief Executive Officer

Well we... and the answer is yes except that, we talked the commodity prices early in the year would actually in the shoulder months come down sooner, although I'm not too sure this current drops are justified. But that is an opportunity because as we commented publicly, there's been a lot of asset packages for sale and that could be everywhere from capital constraints to the word about what the capital gains tax will be in subsequent years based on the elections.

Without making a political comment, I think you'll see a lot of asset packages out there. Although some of the ones that have gone recently in places like East Texas have surprised us with the price and we're happy with what's in our hand but certainly we'll look at additive deals and it's very, very public that we put dry powder in with that bank facility and the debt offering and our capital discipline ways start even in January. So may be there will be some opportunities out there, but there is a lot of asset packages on the market currently.

David H. Keyte - Executive Vice President and Chief Financial Officer

I think in terms of the liquidity in the company to execute, which is different than a permanent financing obviously. We have about $1.2 billion available on our credit facility of June 30 and that's not taking into account our asset sale plan of $300 million to $500 million. So I think in round numbers, working with something like $1.5 billion of liquidity on our credit facility, is where we've got in terms of size, it can be executed quickly.

Tom Gardner - Simmons & Co.

Thank you, gentlemen. I really appreciate your comments.

David H. Keyte - Executive Vice President and Chief Financial Officer

Thank you.

H. Craig Clark - President and Chief Executive Officer

Thank you, Tom.

Operator

Your next question comes from the line of Kent Green with Boston American.

Kent Green - Boston American Asset management

Yes. My question pertains to the Haynesville, would you just give us more color, where do you going to start the drilling acreage or still cumulating acreage at the Haynesville?

J. C. Ridens - Executive Vice President and Chief Operating Officer

Yeah we continue to accumulate. We had our base position as a result of acquisitions but we have got a leasing program that is active. And our drilling plan right now is we continue to take vertical wells down to the Haynesville together additional geotechnical information and get vertical test rates to confirm what we want to do with the horizontal program, which will start in Q3.

H. Craig Clark - President and Chief Executive Officer

I believe we released that two to three wells by year end and as a note when we talk about rights, we are talking about all of the rights, not just exclusively the Haynesville.

Kent Green - Boston American Asset management

Alright. And I mean, preliminarily people have talked about dying stage fracs, long lateral sand I assume that when you start your horizontal program you'll benefit from other people's work so far?

H. Craig Clark - President and Chief Executive Officer

Sure. We've done eight stages so far in our East Texas Cotton Valley. So, that's kind of along the same lines. But, certainly there is a lot to learn on shale's tight gas sands have kind of been figured out.

Kent Green - Boston American Asset management

Thank you.

Operator

Your next question comes from the line of Gil Yang with Citi Investments.

Gil Yang - Citigroup

Hi. Dave, in your opening comments, you sort of hinted that the current prices may limit the ability to set new records. Did you mean that where we are today, you maybe capital constrained or if prices drop further, you maybe capital constrained?

David H. Keyte - Executive Vice President and Chief Financial Officer

I'm not; no I'm not talking about anything in terms of capital constrained. In terms of new records, I'm talking about EBITDA discretionary cash flow and earnings.

Gil Yang - Citigroup

Okay.

David H. Keyte - Executive Vice President and Chief Financial Officer

So, let's be very clear that the business plan is progressing as planned. We will spend our guidance on capital and we'll hit our production that we have guided to as well.

Gil Yang - Citigroup

Okay. The activity will still be there, the question will be profitability will be... will drop because of commodity pricing?

David H. Keyte - Executive Vice President and Chief Financial Officer

That is correct.

Gil Yang - Citigroup

Is there a price at which you might revisit, whether or not you want to grow at 17% rate?

David H. Keyte - Executive Vice President and Chief Financial Officer

Not, this year. But, I think that our capital plan is set. Our business plan is set, and we'll execute this year, regardless of whether the price line is up. '09 we would take a fresh look.

Gil Yang - Citigroup

Okay. And second question is and maybe you mentioned this, have you drilled any horizontal wells in Buffalo Wallow?

J. C. Ridens - Executive Vice President and Chief Operating Officer

No, to-date we've not. We've been participating with other operators in the area Gil, but as we've said in the past, one of the questions that we've got is, when you can achieve rates as high as what we've had from come in with all the verticals, it's very hard for us to ascertain where the benefit of getting a horizontal kicked off than there is. But, we've seen some other operators, particularly, moving closer to us, trying that. And in our participation with them, I think that we'll get another data point that will help us clarify that.

H. Craig Clark - President and Chief Executive Officer

Gil, this is Craig. We've participated in three non-operated; first there was activity on the Oklahoma side of the border that people have noted. And north of us, far north is Lepsican [ph] County. In our close in area, we participated in three non-ops, and I believe the rates were around $6 million a day a piece, which is not as good as you would like when you're drilling verticals that are about three.

Gil Yang - Citigroup

Okay. So, it's basically the multi-stack pay issue that you can't explain that as easily with the horizontal wells.

H. Craig Clark - President and Chief Executive Officer

I think it's likely with the... talk of it, you would see something like that. But, in the Granite Wash it looks like all five of our zones, and I'm strictly speaking about our area, seemed to contribute equally in a robust manner.

Gil Yang - Citigroup

Okay. Great, thank you very much.

Operator

Your next question comes from the line Brian Singer with Goldman Sachs.

Brian Singer - Goldman Sachs & Co.

Thanks, good afternoon.

H. Craig Clark - President and Chief Executive Officer

Hi Brian.

Brian Singer - Goldman Sachs & Co.

Can you provide any more color back of Buffalo Wallow, with regards to, I guess, both offset acreage in particular from the deeper potentials that I imagine you'll be accessing through your verticals?

J. C. Ridens - Executive Vice President and Chief Operating Officer

Yes, we continue to step out, and we're down to as deep as 16,500 feet, with the Buffalo Wallow extension program. We're very happy with what we've been getting there. We've had our best single well, when the Buffalo Wallow area was drilled in the extension area, that was back in the first quarter, I repeat for 7.8 million cubic feet equivalent per day. And, of course, that was all from co-mingle vertical, or Atoka and all the Granite Wash together. So, we're very pleased with what we're doing there, and we continue to open up new sections almost every quarter with that program.

H. Craig Clark - President and Chief Executive Officer

There is a deep part, if you're referring to the Atoka; we take every well into the Atoka. And of course, there is activity north of us in both the Atoka, and the Deep Romero, but north of us as you remember the wells are shallower.

Brian Singer - Goldman Sachs & Co.

Right. Okay, and then when you think about the Haynesville potential and this is maybe a slight question on thinking about capital spending for next year. But, when you think about ramping up drilling in the Haynesville in particular, do you think about that as incremental to your existing program when you think about what that might mean for next year, or what you think about more as a shifting capital into or potentially could be an area of higher returns, and cutting something or rig count somewhere else?

H. Craig Clark - President and Chief Executive Officer

Could be a shift, now because what we would be doing there is, as we've got the property base, and the rig base that we have in East Texas. It makes it very easy for us to shift our capital to and from different projects just as you saw a shift from a vertical program, to a horizontal program in the Cotton Valley based on the success that we achieved with our first couple of wells.

David H. Keyte - Executive Vice President and Chief Financial Officer

Brian, we've seeing the average of well costs I guess, people quoting as $6.5 million for our Haynesville horizontal drilling complete. And your... that's not too far of $5 million or $5.2 million we've used in Cotton Valley horizontal. So, it's not much incrementally, you just have to shift, and you'll try that zone because it's right below you.

Brian Singer - Goldman Sachs & Co.

Great, thank you.

Operator

Your next question comes from the line of Andrew Coleman with UBS.

Andrew Coleman - UBS

I just want to ask a clarification point here on the Buffalo Wallow opening remarks, did you mentioned a range of IPs of 1.8 million to almost 8 million a day?

J. C. Ridens - Executive Vice President and Chief Operating Officer

Yes, that's correct.

Andrew Coleman - UBS

What does that wide range reflects of it, is it like a petrophysical in nature, or is it just evolution of your completion practices?

H. Craig Clark - President and Chief Executive Officer

The range really is representative of the fact that in Buffalo Wallow proper, which has already been downspaced to 20 acre infills, it's shallower, it's a little bit less pressure, and as a result, we get a little less IP. As we move down into the deeper portion of the basin, we pick up on the pressure gradients somehow, as I said we're down to 16,500 feet in total depth there, and as a result, we can see higher rates from those higher pressured intervals particularly at the Atoka.

Andrew Coleman - UBS

Okay.

H. Craig Clark - President and Chief Executive Officer

it's more a function of depth pressure as well, because of shallowest well would be up north at about 11,000 and then JC of the deepest is the 16.5. That's the reason for the variation.

Andrew Coleman - UBS

Okay. Thank you, and then talking about the Deep Austin Chalk play, what counties are you looking at in there again?

H. Craig Clark - President and Chief Executive Officer

It's two counties, Tyler and Houston, but this well is in Tyler.

Andrew Coleman - UBS

Okay. And this is the gas spill there, Austin Chalk zone.

H. Craig Clark - President and Chief Executive Officer

Yes, it's correct. There has been activity down there by some larger companies I think it's Anadarko and Chesapeake. And we've got some acreage I think we've got in an acquisition, and sort of pooled it to drill these horizontals. It's very high pressured and very high rate. But, it's still the same fractured carbonate on the East side, and I think we measured depths of these wells with the laterals are 20,000 foot measured depth. So, it'll take a while to drill and we're already 25% J.C.

J. C. Ridens - Executive Vice President and Chief Operating Officer

Yes.

H. Craig Clark - President and Chief Executive Officer

Yes, we have pooled in, we're 25% in a pretty large acreage block. I think it's one of the lesser slides in the analyst conference. I think it's got the acreage on there. I'm not sure. But, it's pretty good sized block.

Andrew Coleman - UBS

Okay. And then last question I guess, what I'm guessing this is probably close to 20,000 feet, is it fair to think of this as like what would be an analog in that part of country, so, like a James Lime comparable, that is in for lime [ph] or?

H. Craig Clark - President and Chief Executive Officer

It's deeper than the James Lime in terms of total depth. Remember that's a measured depth. That's not true vertical. I don't know the exact true vertical but, you're getting 4,000 or 5,000 foot of lateral with it. And it appears the acreage it's about 37,000 gross acres. And we showed at the analyst conference, the range of some of the other wells out there are from 5 Tcf to 15 Tcf, and based on the area, some of the wells come in from 5 million to 20 million a day. But, it's just a large basin. But, I believe... don't be fooled by the 20,000 and that's probably about I'm guessing a 14,000, 15,000 true vertical depth, and the rest of it's the horizontal lateral.

Andrew Coleman - UBS

Okay.

J. C. Ridens - Executive Vice President and Chief Operating Officer

We're deeper than 15,000 TVD

H. Craig Clark - President and Chief Executive Officer

If Tyler County is not in each, well, it's East Texas. But, it's central-east Texas, it's not Tyler Texas, if you're missed upon the geography, and it's more on the trend with a Chalk that's extended, it's not like...

Andrew Coleman - UBS

Kind of like around Travis [ph] County.

H. Craig Clark - President and Chief Executive Officer

No, it'd about half way between Tyler and Houston, if on a map. But, there is a lot of activity out there most.

J. C. Ridens - Executive Vice President and Chief Operating Officer

Tyler and Houston County.

H. Craig Clark - President and Chief Executive Officer

I'm sorry, Tyler and Houston County are east-west.

Andrew Coleman - UBS

Okay. Alright, thank you. That was helpful. And kind of looking at reserve replacement numbers for the year, do you, kind of given where prices had been for the part of the year, I guess, do you feel comfortable that you might be able to beat either in percentage terms or in total volume terms, is what you guys booked last year?

David H. Keyte - Executive Vice President and Chief Financial Officer

We think in terms of reserves that our costs to replace are going to be inline with our full year average.

Andrew Coleman - UBS

Okay.

David H. Keyte - Executive Vice President and Chief Financial Officer

But, that's to being more precise than that, we've got to wait till the end of the year.

Andrew Coleman - UBS

Excellent.

H. Craig Clark - President and Chief Executive Officer

We'll have this year that we didn't have last year was we'll have a full year piece to next, which is their portfolio of course was dominated in our drilling efforts by South Texas.

Andrew Coleman - UBS

Alright, thank you for your time.

Operator

Your next question comes from the line of David Diamond with Rovita [ph].

Unidentified Analyst

Yes. Hi, good afternoon. Going back to the first person's question on the call, Craig, I am interested in what sort of valuations you're seeing in terms of your assets disposals and how that compared to the current valuation of for a stock trading at I believe the cheapest level it's ever been and less than four times. And, how do you account for the current valuation of the stock given the properties that you're able to sell can trade for significantly higher valuations. And, what, as a manager what's sorts of techniques can you use to potentially unlock, whether there is considerable shareholder value being created?

H. Craig Clark - President and Chief Executive Officer

Well, certainly, the first method to unlock is execution. And then, actually upgrading the assets, for which that package is intended. I'll describe that package as more marginal, not necessarily it's good properties, it's a little more oily. But, there is some more non-op well count in there, then for a stall. I wouldn't think that would be a proxy for what's remaining, because the word of upgrade. If you're referring to asset sales that you see in place like the East Texas, and most recently in Canada, those numbers are far superior in metrics to anything, we've got, and makes things like East Texas, worth a ton based on the current asset trades, and as you know, we've not take that in our assets deals.

David H. Keyte - Executive Vice President and Chief Financial Officer

I think that if I could just comment in terms of asset values that you are seeing out there now, if you are in a good area, and by good I mean, East Texas or something on that, or are you paying $20,000 bucks or more per Mcfe per day, to acquire in that part of the world. And currently, I don't know what we're trading at now, by $11,000 a day or like that. And, we're dominated by those kinds of highly valued assets. The ones we're getting rid off are probably going to command something along the lines of 12,000 to 13,000 per day, and those are not to grow with the assets that we now continue to hold. I think our first set went for about for about 12,000 per day. So, even though the assets that we don't think fit with us necessarily are selling at a premium to what the implied value within the company would be.

H. Craig Clark - President and Chief Executive Officer

net for set the Dave refers, although, not a lot of money was almost entirely non-operating.

Unidentified Analyst

Great. Thank you.

H. Craig Clark - President and Chief Executive Officer

Thank you.

Operator

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

Biju Perincheril - Jefferies & Co.

Yes hi. The property packages that you're allowed there, what was the production from those assets in the second quarter? I think you said you have two packages out?

David H. Keyte - Executive Vice President and Chief Financial Officer

Yes, I still think we're working Biju in the area of 30 to 40 in total a day. It's access are still kind of moving around even within the process. So, I don't want to give pin down on a number at this point. But, we've sold five of them. So, let's say we've got 25 to35 to go; that number could go up or go down depending on what the process brings up. There are certain properties within the assets being marketed that we would keep if we do not get a hurdle number on them.

Biju Perincheril - Jefferies & Co.

Okay. And then if I look at sort of good from this properties these are flat to down, type assets?

David H. Keyte - Executive Vice President and Chief Financial Officer

For us, they are, I mean they're just not properties that we chose to spend capital on it. I'm sure in the hands of somebody else is more interested in the properties they could grow.

Biju Perincheril - Jefferies & Co.

Okay. And then, I'm not sure if you already answered this, in the Buffalo Wallow area, the step out wells that you're drilling, what are those wells costing completed, sort of in the deeper portion of the play?

David H. Keyte - Executive Vice President and Chief Financial Officer

We're looking in at about 3.8 million completed well cost for some of these deeper wells.

Biju Perincheril - Jefferies & Co.

Okay. And on reserves, how much you get?

David H. Keyte - Executive Vice President and Chief Financial Officer

probably similar in the neighborhood of about 2.5 to 3 Bs.

Biju Perincheril - Jefferies & Co.

Okay.

H. Craig Clark - President and Chief Executive Officer

At the analyst conference we showed the average which included shale and deep at 1.6 on reserves, and the cost was I believe around 2.5. But, as you know Buffalo Wallow is closer to 2, the main field, so, that's the average, so that'd about right.

Biju Perincheril - Jefferies & Co.

Okay. Perfect, and then you're drilling on about 80 acres spacing in the step out areas currently, is that right?

David H. Keyte - Executive Vice President and Chief Financial Officer

No, because some of these when we're drilling out on the step outs we're opening up brand new sections. And so, the first well in there, is not on any spacing other than a 640. And then, in a success case we start of with the development on 160s, then we go down to 80s after we've got the 160s,

H. Craig Clark - President and Chief Executive Officer

We're not even remotely close to 80s in the outside area, I think the red dots on the road shale map show that you're probably not even to 640s, because we've just been in step out stuff for a year, and actually some of the acreage we've only owned for a year. The 20s we're not quite to or not even close as in the main field and in for our ranch which one little part to the south which was approved for 40s, so you're... that's the only thing that would even approach 80s, would be those two pods, where most of the dots are currently.

Biju Perincheril - Jefferies & Co.

Okay. Got you, thanks.

Operator

[Operator Instructions]. Your next question comes from the line of David Tameron with Wachovia.

David R. Tameron - Wachovia Securities

Hi, good afternoon. Dave, you just mentioned that what you guys are trading at the 12,000 a point or 11,000 a point, assets have been sold for 20,000 a point, would you consider stock buyback program if the assets is under valued?

David H. Keyte - Executive Vice President and Chief Financial Officer

Not this time, David. I think those have been pretty consistent on this one. With those kind of programs together take time and when you make a commitment like that you get a follow through and we don't know where we would be in three months which is about the amount of time it will take to put something like that together. So we would not be in favor of that in a short term. If conditions persists then and the evaluation gaps persist we'll might take a fresh look at something like that, but we have not been big buyers of stock we had done special dividends but we have not done the big buyers of stock.

David R. Tameron - Wachovia Securities

All right. I mean so the flip side of that would be so if you do have excess cash posted where it should be more likely to spend those via acquisition?

H. Craig Clark - President and Chief Executive Officer

I think that would be more likely to acquire, yes.

David R. Tameron - Wachovia Securities

Okay.

J. C. Ridens - Executive Vice President and Chief Operating Officer

On the long inventory that as you know, you move it up in NAV, Dave and that buyback opinion is not that never its just because when you did distribute it virtually all of the proceeds on the manner [ph] deal that was probably better than a buyback program because it was over $1 billion at the time.

David R. Tameron - Wachovia Securities

Yes.

J. C. Ridens - Executive Vice President and Chief Operating Officer

But the17,000 location versus acquisition as, Dave, said on the last call usually found somewhere to go and I hope like our last East Texas acquisition is always additive of as that one has already turned out to be.

David R. Tameron - Wachovia Securities

All right and just following up on that, Craig, if you look out to 2009, how much faster... how do you run it internally right now how much faster can you run I mean can you increase CapEx? Assuming cost a flak can increase CapEx another 10% or 15% next year. If prices are there and obviously this is a industry question as well as the forest question but I just want to see what your take on it was.

H. Craig Clark - President and Chief Executive Officer

We are pretty we're kind of flat typically drilling in it has in cycle either up or down. Clearly we adjusted for cash flow and just like when you acquire an acquisition, that's $200 million you don't need a lot of people I think that you are not going to... I have seen some really, some big number for people taking rig counts up like on horizontal plays from 4 to 20 or some big numbers. We could increase 10% to 15% but going the doubling and quadrupling the rig count in an area, I think the industry in general is going to bump up against pipe and rig availability.

David R. Tameron - Wachovia Securities

Okay. That's good color thanks, and then final question. You mentioned you have built this on ... what's the lead time? I think those rigs delivered.

H. Craig Clark - President and Chief Executive Officer

Four rigs.

David R. Tameron - Wachovia Securities

Four of the rigs--

H. Craig Clark - President and Chief Executive Officer

Yes since we've call wind up first ones November, second one is December and the others after the first three year.

David R. Tameron - Wachovia Securities

Okay. So it is about whether it's like a six month lead time, by the time you have put your order end?

H. Craig Clark - President and Chief Executive Officer

Yes, probably about right. The it's longer now than it was when we order of those. And that will get us I guess on the triples again trying to cater the program in balance because we have two singles, five doubles that would bring us up to like its 6 to 7 triples, 8 triples on the math that's kind of the balance and really those are the kind of rigs that you are going to need for some of this horizontal activity. So I'd say that activity is horizontally driven on Forest's part. And you could do the same thing in some regard with the term contract, if that occurs but there is a big demand for I would say your medium larger rigs out there right now and this addresses for Forest.

David R. Tameron - Wachovia Securities

All right thanks nice quarter particularly on the cost side.

J. C. Ridens - Executive Vice President and Chief Operating Officer

Thanks.

H. Craig Clark - President and Chief Executive Officer

Thanks, David.

Operator

Your next question comes from the line of Jeff Robertson with Lehman Brothers

Jeffrey W. Robertson - Lehman Brothers

Thanks. Craig, a question on the reserve potential in the article tax you all are showing about 1.1 Tcf now versus short of 700 Bcf previously has that changed pretty much entirely related to the acquisition?

H. Craig Clark - President and Chief Executive Officer

Yes.

Jeffrey W. Robertson - Lehman Brothers

Okay. And then secondly can you talk a little bit about a Barnett Shale and where that stands this year in trying to move to move that from still a new ventures type play to a development play?

H. Craig Clark - President and Chief Executive Officer

Well the we kind of one rig program in hill with the new partner you could possibly accelerate that to several rigs it still remains pretty active over there is one rig running currently. And we are into discussions with the new partner on whether it's a ramp that up. Either on, our acreage or theirs. And any ramp is pretty much up to us. We've had a one rig program, off and on to get the seismic in from the deal, I guess, we did first quarter I believe. And so, you'd need to ramp the rig activity up in one of those areas, we're still running that at East Texas. So we have the option to bring the rig up from land or move one over. If we have least explorations I'd say that, if you didn't ramp up it would be later this year with your partner in Hill. That would be safe to say, J.C?

J. C. Ridens - Executive Vice President and Chief Operating Officer

Yes, would be, because our discussions are looking at Hill County assets, we've done the so called quarter, we've done some step outs to gather additional data, and now if we are going to have to ramp up, it's going back to the core area.

Jeffrey W. Robertson - Lehman Brothers

J.C, those drilling results, then they justify considering they're for 2009 capital?

J. C. Ridens - Executive Vice President and Chief Operating Officer

Yes.

Jeffrey W. Robertson - Lehman Brothers

Okay. And Craig, is their anything new at Katie?

H. Craig Clark - President and Chief Executive Officer

Exxon has approved another batch. And I believe that's mostly drilling wells, and I think is there is a deep one in there J.C.

J. C. Ridens - Executive Vice President and Chief Operating Officer

We have not gotten into deeper if you approved Jeff, we have shown them the deep idea, and I think that that's more of a 2009 type of project, because the multiple rig, our multiple well plan that we showed them was focused on shallower intervals, you gave well, an upper Wilcox with the deeper Wilcox probably being an'09 project.

Jeffrey W. Robertson - Lehman Brothers

Okay, thank you.

H. Craig Clark - President and Chief Executive Officer

Six AFE they approved Jeff; so, that we're trying to batch them, and then bring a rig in from our other South Texas operations which had helps now that we've got others South Texas operation. And as you know, that's a unit agreement, we need their blessing and I believe its six wells.

J. C. Ridens - Executive Vice President and Chief Operating Officer

Yes.

H. Craig Clark - President and Chief Executive Officer

And every time we drill, we ramp the right up, and then hold until the next program. It would be our goal to get a continuous program with our partner. But, thus far, we're just getting ahead of this in batches, based on their approval.

Jeffrey W. Robertson - Lehman Brothers

Thanks.

Operator

Your next question comes from the line of Dan Mcspirit with BMO Capital Markets.

Dan Mcspirit - BMO Capital Markets

Gentleman, for the three to four horizontal tests, in the shale, by how much will you vary the lateral links and the completions across those wells?

J. C. Ridens - Executive Vice President and Chief Operating Officer

Our target is starting out for about a 2000 foot horizontal. And frankly, what we will do is we'll see how the drilling is proceeding. And, if we are making really good haul and not seeing any haul problems we'll probably push that little bit, in order to gain some more data on how far you can actually drill the horizontals in the shallow environment. That will also of course determine how many stages back we are going to go with. Initially we're only going to go with about four stages and the reason for that is just simply to gather more data on the rock properties that we see during the simulation, see how effective that is, and typically what we've done is we start off with fewer stages in the initial batches and then as we refine our completions we increase the number of stages. Obviously with a 2,500 foot lateral, we could probably do up to 8 or 9 stages.

Dan Mcspirit - BMO Capital Markets

Right.

H. Craig Clark - President and Chief Executive Officer

Then, the... what we shallow on average depth of the analyst conference of 4000 to 7000 feet measured, the fluctuations not the lateral, it's actually the true vertical depths that range from 2500 to 6000 or 5000 feet. It's not the lateral, it's the true vertical depth because that falls off deeper pretty quickly from North to South.

Dan Mcspirit - BMO Capital Markets

Right, right got it. And these are slick water correct?

H. Craig Clark - President and Chief Executive Officer

Probably couldn't comment at this time since we haven't gotten all the wells down and proprietary reasons but the first frac were some where to Barnett Shale.

Dan Mcspirit - BMO Capital Markets

Got it Okay well assuming there is water involved here, much has been then discussed to play with regard to what are procurement in disposal issues in the Appalachian basins, specifically the drilling of Marcellus wells any issues like that on the horizon?

H. Craig Clark - President and Chief Executive Officer

That one's easy. The St Laurence River was a clinical source and that's where we got our frac water and treated it.

Dan Mcspirit - BMO Capital Markets

Perfect. That's all I got thank you.

H. Craig Clark - President and Chief Executive Officer

Okay thank you

Operator

There are no further questions at this time Mr. Kennedy, are there any closing remarks.

Michael N. Kennedy - Vice President of Finance and Treasurer

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

Operator

Thank you for your participating in today's conference call. You may now disconnect.

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Source: Forest Oil Corp. Q2 2008 Earnings Call Transcript
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