Forest Oil Corporation (FST) reported its fourth-quarter 2009 earnings of 56 cents per share, compared with the Zacks Consensus Estimate of 60 cents and a year-ago profit of 32 cents. Before adjusting one-time items, earnings were 40 cents per share.
 
Results came in below expectations mainly due to lower sales volumes and realized prices, partially offset by reduced DD&A (depreciation, depletion and amortization) expenses.
 
Estimate Revisions Trend
 
We see a positive trend in estimate revisions. For the last 30 days, 6 of the 18 analysts covering the stock raised their estimates for the full fiscal 2010 while only one analyst moved in the opposite direction. However, in the last 7 days, no up or downside movements were noticed.
 
Currently, the Zacks Consensus Estimate for full fiscal 2010 earnings is $2.17 per share, which is well above the full fiscal 2009 earnings of $1.89.
 
The company’s earnings surprise for the preceding four quarters varies between negative 23.8% and positive 70.6%, with the average being positive 13.2%.
 
Operational Performance
 
Sales volumes for the quarter came in at 459.3 MMcfe/d (76% natural gas), down more than 19% from 568.8 MMcfe/d in the corresponding 2008 period. The decrease was due to significantly lower natural gas sales in the United States.
 
Average equivalent price per Mcfe (including the effect of hedging) was $5.82, down 9.5% from the year-ago realization. Average realized prices (inclusive of hedging activities) were $5.35 per Mcf of natural gas and $58.87 per barrel of oil, a decrease of 13% and 1%, respectively, from the same period a year ago.
 
During the quarter, production expenses decreased more than 13% year-over-year to $1.10 per Mcfe. Unit general and administrative expenses for the quarter increased 50% year-over-year to 42 cents per Mcfe. 
 
At the end of the quarter, the company had $467 million in cash and long-term debt of approximately $2.02 billion (debt-to-capitalization ratio of 65.2%). Forest divested $1.1 billion assets in the last year to reduce its debt level. The company anticipates a 10−12% organic production growth this year.
 
Despite the improving commodity-price environment, we remain concerned about the company’s debt-heavy balance sheet as well as its weak production and reserve growth profile. Our Neutral recommendation remains unchanged at this stage.

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