Forest Oil Corporation (FST, Financial) last month announced financial and operational results for the second quarter of 2014. For the three months ended June 30, 2014, Forest reported a net loss of $83 million, or $(0.71) per diluted share, compared to a net loss of $21 million, or $(0.18) per share in the first quarter of 2014. Net loss for the second quarter of 2014 included the following items:
- Ceiling test write-down of oil and gas properties of $77 million
- Gain on asset dispositions of $22 million
- Merger-related costs of $10 million
- Unrealized losses on derivative instruments of $7 million
- Rig lease buyout/stacking costs of $3 million
Without the effect of these items, Forest’s results for the second quarter were as follows:
- Adjusted net loss of $7 million, or $(0.06) per diluted share
- Adjusted EBITDA of $31 million
- Adjusted discretionary cash flow of $16 million
Management comment
Patrick R. McDonald, president and CEO, commented, “We accomplished several objectives during the second quarter as we announced a proposed merger with Sabine Oil & Gas that will create one of the industry’s largest East Texas players and received final disbursement of escrowed funds from our $1 billion Texas Panhandle divestiture. Our proposed merger with Sabine continues to progress in a timely manner, and we are working diligently to complete this transaction during the fourth quarter. Our priority for the remainder of the year will be to direct capital to our highest rate-of-return projects to generate increased capital efficiency within our drilling program as we work to optimize capital spending ahead of the merger closing. This will result in a reduction in capital expenditures and a corresponding reduction in the number of wells to be completed during the second half of the year as compared to our earlier guidance.”
Average net sales volumes, average realized prices and revenues
Forest's average net sales volumes for the three months ended June 30, 2014, were 100 MMcfe/d (69% natural gas, 31% liquids). This compares to average net sales volumes of 105 MMcfe/d (68% natural gas, 32% liquids) for the three months ended March 31, 2014. The decline in average net sales volumes from the first quarter was primarily the result of delays in well completions and from the lower-than-expected production rate from an East Texas well, where a mechanical issue resulted in an approximate 20% effective completed lateral length of 1,000 feet.
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Total cash costs
Forest's total cash costs for the second quarter of 2014, excluding stock-based compensation and employee-related asset disposition costs, remained essentially unchanged from the first quarter of 2014 at $41 million. Total cash costs on a per-unit basis were slightly higher compared to the first quarter of 2014 as a result of lower equivalent production volumes.
Exploration and development capital for the six months ended June 30, 2014 totaled $82 million compared to budgeted exploration and development capital of $109 million for the first half of 2014. The lower-than-budgeted capital spending is primarily attributable to drilling and completion delays within the Ark-La-Tex and Eagle Ford areas.
Ceiling test write-down
Forest recorded a non-cash ceiling test write-down of $77 million in the second quarter of 2014 pursuant to the ceiling test limitation prescribed by the Securities and Exchange Commission for companies using the full cost method of accounting. The write-down was primarily the result of a downward revision of previous reserve estimates in the Eagle Ford due to well performance that resulted in a 13% decrease to the company’s type-curve and a reduction in the number of proved undeveloped locations in the Eagle Ford pursuant to the SEC five-year rule due to a slower pace of planned future development.
Operational project update
Consistent with the drilling program the company has outlined in previous updates, Forest increased drilling activity targeting the liquids-rich cotton valley formation in east Texas with the addition of a third drilling rig during the second quarter.
Since the company’s last earnings release, two cotton valley wells were completed in Rusk County that had a 30-day average gross production rate of 11 MMcfe/d (40% liquids). The production rate for these new wells is performing above the type-curve. In addition, the completion of a well that was expected to begin producing in April was deferred until mid-July due to a mechanical issue that resulted in the completion of only 1,000 feet of the well’s lateral. Since being placed online, the well has averaged approximately 2 MMcfe/d (52% liquids) during its initial 20 days of production from the short lateral. However, when normalized for the type-curve lateral length of approximately 4,400 feet, the production rate is calculated to be approximately 10 MMcfe/d. Two additional wells are currently in varying stages of completion operations and do not have sufficient production history to report at this time.
Forest also drilled a well during the second quarter within its light sweet crude oil play located in Cherokee County, Texas. The company has recently initiated completion operations on the well.
Net sales volumes for the Ark-La-Tex averaged approximately 85 MMcfe/d in the second quarter of 2014. Forest plans to operate three drilling rigs in the Ark-La-Tex for the second half of 2014.
In the Eagle Ford, Forest has essentially completed the acreage holding phase of its drilling program and is presently focused on development drilling. The Company has completed the reprocessing of its 3D seismic surveys and is utilizing the data to select drilling locations for the second half of 2014 drilling program. Net sales volumes from the Eagle Ford averaged approximately 2,500 Boe/d during the second quarter. Gross drilling and completion costs for the wells drilled during 2014 have averaged approximately $4.5 million per well. Plans for the second half of 2014 entail operating one drilling rig in the Eagle Ford.
2014 guidance
Incorporating the operational results for the first half of 2014 and maintaining a disciplined capital program ahead of the proposed merger with Sabine Oil & Gas will result in spending less capital and in a corresponding reduction in the number of wells drilled during the second half of 2014. Accordingly, Forest is adjusting its 2014 full-year guidance as follows:
Drilling and completion capital is expected to be in a range of $220 million to $230 million (excluding capitalized interest, capitalized stock-based compensation and asset retirement obligations incurred) for 2014 as compared to a previous range of $260 million to $270 million. This will fund a three-rig program in the Ark-La-Tex and a one-rig program in the Eagle Ford. The total capital budget is expected to be in a range of $240 million to $250 million compared to a previous range of $290 million to $310 million.
- Average net sales volumes are expected to be in a range of 105-110 MMcfe/d for 2014. The liquids component of our equivalent production is expected to average approximately 33% of the average net sales volumes.
- Production expense, which includes lease operating expense, ad valorem taxes, production taxes, and product processing, gathering and transportation, is expected to average $1.95 to $2.05 per Mcfe compared to a previous range of $1.55 to $1.65 per Mcfe.
- Depreciation, depletion and amortization expense is expected to be $2.30 to $2.40 per Mcfe compared to a previous range of $2.45 to $2.65 per Mcfe.
