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Independent Forest Oil Puts Up $615M for Forcenergy

Independent Forest Oil Puts Up $615M for Forcenergy

Denver-based Forest Oil Corp. has agreed to purchase another independent producer, Forcenergy Inc., for $615 million in stock, a move that is expected to significantly boost the new company's operations in the Gulf of Mexico, Alaska and Canada.

Forest will exchange 1.6 shares, equal to $25.60 at close on July 7, for each Forcenergy share, a 21% increase over its July 7 closing price. Following the takeover expected this fall, Forest investors will own 56% of the new Forest Oil Corp., while Forcenergy shareholders will own 44%. Forest Oil will continue to be headquartered in Denver, and initially will have approximately 48 million shares outstanding with a market capitalization of more than $1.5 billion, based on Forest's closing price of $16.00 per share on Friday.

The merger will move Forest Oil into the top 10 on the U.S. independents' list, and help it establish a platform for expansion in "frontier exploration areas" like Alaska and Canada, said CEO Robert Boswell. Boswell, who joined Forest in 1995, noted Forest's long-term plan was to build a company valued between $1 billion and $2 billion by 2000.

"We have reached that goal with this acquisition," Boswell said, and "more important, we have created shareholder value."

Boswell said the merger will allow the company to achieve three goals: maximize its production in the Gulf of Mexico; grow the company's value in the Canadian Foothills and Northwest Canada; and redeploy cash flow from ongoing operations to begin more frontier exploration in Alaska, Canada and on an international level.

"This combination meets Forest's criteria of strategic fit. It places the company in one of North America's highest potential frontier exploration areas in Alaska with an established platform of expansion," Boswell said. "It significantly increases the company's position in the Gulf of Mexico where Forest has historically achieved its highest rates of return and it will enable the company to capture additional opportunities as well as cost savings."

An increased cash flow from the merger is expected to help Forest fund its growing portfolio of "high impact exploration and development opportunities," he said. On the exploration side, Forest brings its potential in the Northwest Territories of Canada, the Beaufort Sea and offshore South Africa. Forcenergy will contribute the Cook Inlet potential in Alaska.

On the development site, the new Forest Oil has identified a "broad portfolio" of projects, focusing most of its immediate attention on the Gulf of Mexico. Here, Forcenergy brings in a "significant asset base" that was underutilized when Forcenergy experienced financial problems in 1998 and 1999 and had to reorganize (see NGI, March 29, 1999; Nov. 29, 1999) Low oil prices in 1998 forced the debt-ridden Forcenergy to reduce drilling in the Gulf, and this is an area that Forest is expected to immediately rejuvenate.

With continued drilling in the Gulf of Mexico, the new company will become one of the largest operators on the shelf. Development in the Canadian Foothills and the Liard Plateau in the Northwest Territories also is expected to grow. Management also has identified more growth opportunities in the existing onshore fields.

If the companies had been combined in 1999, officials estimate that cash flow would have been about $234 million. For 2000, assuming production of 465 MMcfe/d to 500 MMcfe/d, historical expense rates, NYMEX prices of $3.25 for natural gas and $25 for oil, and taking into account the hedged position of both companies, cash flow on a pro forma basis is forecast to increase to a range of approximately $300 million to $325 million.

Shareholders are expected to vote on the merger in the next few months, while directors at both companies have unanimously approved it. Boswell will remain CEO of Forest and Forcenergy, while Forcenergy CEO Richard Zepernick will become Forest's new president.

Carolyn Davis, Houston

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