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Forest's Texas Three-Step Leans Toward Eagle Ford

Forest Oil Corp. continues to step up its activity in the Eagle Ford Shale of South Texas with the aid of a recently struck joint venture while it expands activity in the Texas Panhandle. East Texas results remain consistent and predictable, and the company is developing a new oil project in the area, said CEO Patrick R. McDonald.

"During the first quarter, we continued an active development program and will soon have the six rigs at work, three in the Eagle Ford Shale, two in the Texas Panhandle and one in East Texas," McDonald said during an earnings conference call. "We plan to maintain this level of activity in the Panhandle and East Texas throughout the year. We will also add a fourth rig to the Eagle Ford program in the coming months as we ramp up the drilling program on the acres in Gonzales County."

In the Texas Panhandle, Denver-based Forest has an inventory of more than 500 drilling locations within the Hogshooter, Tonkawa, Douglas, and other oil intervals. The current focus of the Hogshooter program is in Wheeler County, TX, where Forest has identified more than 100 potential opportunities. Recently, two Missourian Wash (Hogshooter) wells were completed that had a 30-day average gross production rate of 1,800 boe/d (80% oil).

Linn Energy LLC also is targeting the Hogshooter on both sides of the Texas-Oklahoma border. Recently, the company said it was having better luck on the Oklahoma side (see Shale Daily, April 29); however, Forest executives said they're doing just fine with the Hogshooter in the Texas Panhandle.

"...I don't know that we're doing anything differently [from Linn]," McDonald said in response to an analyst's question. "We're pretty happy with our prospects there, and our program for the next couple of quarters is already well mapped out."

CFO Michael N. Kennedy added, "...we've already said our EURs [estimated ultimate recoveries] are between 350,000 and 500,000 bbl, and we've definitely been hitting in that range. I don't know if others had higher expectations." McDonald said during the call that the company's Hogshooter locations "have superior economics" to its East Texas opportunities, so Forest is planning to stick with two rigs in the Panhandle and one in East Texas.

In the Eagle Ford Shale, Forest has 688 gross drilling locations (344 net) identified based on 80-acre spacing and more than 100 million bbl of un-risked resource potential on a net basis, according to the company. Net sales volumes from the Eagle Ford are expected to increase to more than 6,500 boe/d in 2014 from an average of 1,600 boe/d in 2012.

Net sales volumes from the Eagle Ford averaged 1,900 boe/d in the first quarter, which compares to fourth quarter 2012 volumes of 2,300 boe/d. The decline was the result of initiating multiwell pad drilling during the fourth quarter.

"Our [Eagle Ford] joint venture partnership [JV] with one of the industry's leading science and technology companies [Schlumberger (see Shale Daily, April 15)] will allow us to enhance and create efficiencies in all facets of our drilling and completion operations, as well as ongoing operating expense reductions," McDonald said. "We believe that this program will allow us to hold the entire 55,000 acres that we now consider to be the core area."

McDonald said the JV results in 10 additional wells in 2013 and 20 additional wells in 2014 compared to the company's previous program. "We believe that the 2013 wells will be on production later in this year, most likely Q4, and do not anticipate that they will materially change our average net sales volume for 2013. However, we believe that the full benefit of the ramped-up program will kick in during 2014..."

Eagle Ford well costs are coming down. "I think, we've been able to bring our well cost down from single-well costs in the $7 million range down to the low $6 millions, and we're trying to push it down below $6 million through the pad drilling effort," McDonald said.

In East Texas, Forest is targeting higher-margin oil and liquids-rich opportunities within the Cotton Valley and other zones. Recently, one horizontal Cotton Valley well was completed with a 30-day average gross production rate of 6 MMcfe/d (40% liquids). A one-rig program is to continue through the year.

"We like the predictability and consistency of our results in East Texas," McDonald told analysts. "We're also actively developing an oil project in East Texas that we haven't talked about publicly [It's not in the Cotton Valley]. So we're actually pretty high on our possibilities there as we go forward."

Forest reported a first quarter net loss of $68 million (minus 59 cents/share) compared to a net loss of $33 million (minus 29 cents/share) in the year-ago quarter. First quarter 2013 results included the effect of unrealized derivatives losses and other items. Adjusted for these, earnings were $3 million (3 cents/share) compared to $13 million (11 cents/share) in the year-ago quarter. The Street was looking for earnings of 2 cents/share in the first quarter, according to Standard & Poor's Capital IQ.

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