Forest Oil: A Speculative Idea

JJ Butler profile picture
JJ Butler

In January we considered Forest Oil (NYSE:FST-OLD) 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 (EOG) and Plains Exploration (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

This article was written by

JJ Butler profile picture
JJ Butler (pseudonym) spends his days doing research for investment and writing. As a teen he was inspired by two biographies on Warren Buffet and subscribed to the Wall Street Journal. Today Jeff reads 10-Q filings and takes notes while listening to company conference calls. Jeff resides near Lake Michigan, enjoys spending time with his wife and toddler and coach’s girls’ basketball. See Seeking Alpha's policy on policy on anonymous contributors.

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