With the announcement of tremendous production results from two of its latest Texas wells, shares of Forest Oil Corporation (FST) jumped more than 10% yesterday to a 52-week high of $27.70. 
 
The third and fourth wells in the Texas Panhandle Granite Wash region came in with an average 24-hour production rate of 37 MMcfe/d (million cubic feet equivalent per day), compared to an average of 23.5 MMcfe/d for the company’s first and second wells in this area. These wells delivered not only extremely high gas rates, but also strong liquid components.
 
At the beginning of this month, Forest announced higher capital expenditures for this year to support an anticipated increase in its drilling activity. The company said it expects to spend $600 million to $700 million for the year, about 18% higher than the expected 2009 capital spending. Forest also intends to increase the number of its operating rigs to 20 (from 12 rigs currently) by the end of the first quarter.
 
We view Forest’s increased capital spending plan followed by the divestiture of Permian Basin assets as positive since this will not only help the company to focus on core development assets in the Granite Wash and Haynesville Shale plays, but also unlock shareholder value.
 
While we cite our positive view, we think that a more material contribution to production growth/returns from these plays will be needed for Forest to outperform.
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