Forest Oil: A Speculative Idea

| About: Forest Oil (FST)
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In January we considered Forest Oil (NYSE:FST) and noted their then depressed stock price relative to the asset base. Noted was the lack of a catalyst for the stock, in particular the absence of an Eagle Ford oil production ramp up plan. Since then the stock has been cut in half again.

First in May the COO tendered his resignation to run his own show , then in June the long time CEO was gone. Forest is being sued over its crazy IPO spin out of Lone Pine Resources (LPR) last year. Shareholders become grumpy when their IPO collapses by 80%. Additionally, a small asset sale fell through. With very low natural gas prices, at least Forest already dropped the Haynesville rig they added only last fall.

In order for the potential deep value of Forest Oil to be recognized in the share price, oil drilling needs to accelerate. Forest's Granite Wash liquids play is excellent, but NGL pricing may be under pressure going forward. Forest needs to drill their oil assets in the Permian basin and especially in the Eagle Ford.

To accomplish this, Forest needs their geology and science work to move along, on which they are behind peers like EOG Resources (NYSE:EOG) and Plains Exploration (NYSE:PXP). Secondly, Forest needs to be able to finance the drilling. Forest does not have the ability to increase drilling from cashflow. Their $1.8 billion in long term debt prohibits further borrowing.

Forest intends to raise the capital to drill oil using the JV model. Plans for a deal to be announced in the second quarter just passed obviously did not occur. Certainly the executive departures greatly hindered the process, though the data room has been open since the beginning of the year.

As the Board of Directors searches for a new chief, the interim CEO is personally involving himself in the Eagle Ford JV process. So yes, the Forest Oil Eagle Ford JV ought to be coming soon. However, one analyst questioned whether Forest, with a long and proud history, can remain independent.

Different possibilities exist on playing Forest shares, shares which promise to be volatile in the near term. The deep value investor could buy and hold, believing in the deep value. The speculator might attempt to play for a pop in the stock on a successful joint venture announcement. The skeptic would walk away, wondering if Forest is too far behind on the science work. The risk adverse investor could wait to buy until after potential Eagle Ford monetization and new CEO announcements arrive. Scaling in makes sense. Just remember, with a $7 stock a 20% fall could occur in a heartbeat. Good luck!

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.