Denver-based Forest Oil Corporation’s (FST) fourth quarter 2010 earnings of 44 cents per share (excluding non-recurring items) missed the Zacks Consensus Estimate of 47 cents and came in well below the year-earlier numbers of 56 cents. Despite higher sales volumes and lower operating costs, earnings missed our estimate due to lower commodity prices.
Full-year 2010 earnings declined 12% year over year to $1.66 per share, below the Zacks Consensus Estimate of $1.69.
Total revenue in the reported quarter increased marginally to $214.4 million, but remained below the Zacks Consensus Estimate of $250 million. Full-year 2010 revenue improved 11% year over year to $854.8 million, but failed to match up to our expectation of $928.0 million.
Operational Performance
Net sales volumes grew 19% year over year organically to 472 million cubic feet equivalent per day (MMcfe/d) in the reported quarter.
The average equivalent price per Mcf (including the effect of hedging) was $5.73, down from $6.49 in the year-ago realization. Average realized prices were $4.57 per Mcf of natural gas, down 21% from the comparable prior-year quarter.
Average realized prices were $75.46 per barrel of oil, up approximately 10% from the year-ago quarter. Average realized prices were $37.93 per barrel of natural gas liquids (NGLs), up more than 12% from fourth quarter 2009.
During the quarter, production expenses decreased 3.6% year over year to $1.06 per Mcfe. Unit general and administrative expenses plunged approximately 31% year over year to 29 cents per Mcfe. Depreciation and depletion expenses per unit upped 7% to $1.66 per Mcfe from $1.55 per Mcfe in the corresponding 2009 quarter.
At quarter end, Forest had $218.1 million of cash and cash equivalents with $1.869 billion of long-term debt, representing a debt-to-capitalization ratio of 58% (down from 58.6% at the end of third quarter 2010).
Outlook
Forest expects its net sales volume guidance at 470 MMcfe/d for 2011 compared with its previous target of 490 MMcfe/d. Further, first quarter 2011 net sale volumes are likely to be down approximately 4 Bcfe due to the divestitures of assets.
Management also forecasts to spend $600 million to $650 million, which mainly reflects enhanced drilling program at its liquids-rich Granite Wash assets in the Texas Panhandle, Deep Basin gas assets and Peace River Arch light-oil assets in Canada.
Importantly, almost 80% of the capital expenditure will be apportioned to liquids-rich prospects. The remainder is to be shelled out primarily for gas development in the Deep Basin of Alberta, Canada, that promises profits through provincial royalty incentives.
We like Forest Oil’s initiatives toward increased liquids production. The company’s focus on cost control and the upside from Granite Wash and Haynesville, position it well to weather the weakness in natural gas prices. The company anticipates its cash costs to range between $2.15 and $2.35 per Mcfe, down approximately 7% from the 2010 annual guidance.
While an improvement in terms of debt reduction is palpable, it still lies at an above-average level versus its peers, such as Apache Corp. (APA) and Devon Energy Corporation (DVN). Consequently, we maintain our long-term Neutral recommendation for the stock. Forest Oil also holds a Zacks #3 Rank (short-term Hold rating).
APACHE CORP (APA): Free Stock Analysis Report
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FOREST OIL CORP (FST): Free Stock Analysis Report
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