Denver-based Forest Oil Corporation (FST) reported third quarter earnings of 37 cents per share (excluding non-recurring items), well below the Zacks Consensus Estimate of 44 cents and year-ago quarter’s earnings of 48 cents. Despite higher sales volumes and lower operating costs, earnings missed our estimate due to lower commodity prices.
Revenues in the reported quarter increased to $210.4 million from the year-earlier level of $177.1 million, but remained below the Zacks Consensus Estimate of $233 million.
Operational Performance
Net sales volumes grew 16% organically to 457 million cubic feet equivalent per day (MMcfe/d) on a year-over-year basis.
The average equivalent price per Mcf (including the effect of hedging) was $5.64, down from $5.91 in the year-ago realization. Average realized prices were $4.74 per Mcf of natural gas, a decrease of 10.4% from the comparable period last year. Average realized prices were $71.48 per barrel of oil, an increase of approximately 11% from the year-ago quarter. Average realized prices were $31.29 per barrel of natural gas liquids (NGLs), up 20% from third quarter 2009.
During the quarter, production expenses increased slightly year over year to $1.18 per Mcfe. Unit general and administrative expenses in the quarter jumped approximately 11% year over year to 31 cents per Mcfe. Depreciation and depletion expenses per unit upped 3% in the third quarter to $1.54 per Mcfe from $1.49 per Mcfe in the corresponding 2009 quarter.
At the end of third quarter 2010, Forest had $251.6 million of cash and cash equivalents with $1.87 billion of long-term debt, representing a debt-to-capitalization ratio of 58.6% (down from 60.2% at the end of the second quarter).
Outlook
Forest raised its net sales volume guidance range to 470–480 MMcfe/d and 450–455 MMcfe/d for the fourth quarter and full-year 2010, respectively. Management stated that the guidance increase was mainly driven by the enhanced drilling program in the Texas Panhandle play.
We like the company’s initiatives toward increased liquids production. Liquids-to-total production increased to 26% in the third quarter from 22% in the first quarter of 2010. The company is expecting a further increase in the fourth quarter, which is targeted at 28%.
With the company’s focus on cost control and the upside from Granite Wash and Haynesville, Forest Oil is well positioned to weather the weakness in natural gas prices.
While an improvement in terms of debt reduction is noticeable (debt-to-capitalization decreased to 58.6% from 60.2% at the end of the second quarter), it still lies at above-average level. Consequently, we maintain our long-term Neutral recommendation with a Zacks #3 Rank (Hold) for the short term.
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