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Forest's Gulf Operations Spin-off to Merge with Mariner Subsidiary

September 19, 2005
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Forest Oil Corp. is spinning off its extensive offshore Gulf of Mexico operations and merging the spin-off in a stock-for-stock transaction with a subsidiary of Mariner Energy Inc.. The move will make Denver-based Forest a pure onshore resource company and elevate Mariner into becoming a leading offshore independent.

Under the terms of the transaction, Forest will incorporate a separate entity, "Spinco," which will include all of its offshore Gulf operations and some derivative liabilities, with a market share of $50 million on June 30. Forest will distribute to its shareholders all of the common stock of Spinco, which will then merge with a wholly owned subsidiary of Mariner. As a result of the transaction, in addition to retaining all of their shares of Forest common stock, Forest shareholders will receive 0.8 shares of Mariner common stock for each Forest share owned as of the record date of the transaction.

Forest shareholders will receive 58% of the common stock of Mariner on a diluted basis. Spinco will borrow from a third party and pay to Forest $200 million in cash, subject to adjustments to reflect an economic effective date of July 1, 2005, which Forest will use to pay down debt. Mariner plans to apply to list its shares on the New York Stock Exchange.

Standard & Poor's Ratings Service (S&P) said Forest's offshore reserves represent about 24% of its total proved reserve base and currently contribute about half of its consolidated earnings.

"As is typical with offshore Gulf of Mexico reserves, the wells generate substantial cash flow in the early years and then decline sharply," S&P said. The ratings service said it is concerned that the spin-off will lead to an increased debt to earnings and diminish Forest's near-term free cash flow generation capability.

Pro forma for the spin-off, Forest's percent of proved-developed reserves will remain unchanged at 74%, and the remaining reserves will have a longer average life and require less future development costs, S&P noted.

"We are undertaking this spin-off to facilitate the business combination with Mariner, thereby providing our shareholders the benefits of owning two best-in-class E&P companies," said Forest CEO H. Craig Clark. "Mariner will be a well-capitalized, Gulf of Mexico explorer with an excellent track record, strong cash flow attributes, and broad exposure to deepwater, shelf and deep shelf opportunities. Forest will be a well-capitalized, long-lived onshore resource company with a significant exploitation inventory and a proven acquire and exploit track record in North America.

"The spin-off will permit each management team to more clearly focus its efforts on the activities and types of assets that have made them successful. We believe the value proposition to our shareholders is compelling, as this transaction and the continued execution of existing business plans by both companies will help unlock the intrinsic value of our shares."

Mariner CEO Scott D. Josey said the transaction " provides us the unique opportunity to more than double our asset base and to emerge as a leading player in the Gulf of Mexico, with the scale and financial strength to pursue shelf, deep shelf, and deepwater opportunities. We look forward to transitioning Forest's Gulf of Mexico assets from a historically maintenance mode to a growth mode."

The boards of directors of both companies unanimously approved the transaction. The transaction is subject to regulatory approvals and other customary conditions, including stockholder approval and the consent of Forest's bondholders. Approval of the transaction by Forest's shareholders is not required.

Following the transaction, Mariner's board will consist of its five current directors plus two new directors to be mutually agreed by Forest and Mariner. Forest management and its board of directors will continue in their current positions with Forest. Mariner management will continue in their current positions with Mariner. The transaction will be tax free to Forest and its shareholders.

Citigroup Corporate and Investment Banking and Credit Suisse First Boston LLC were financial advisers to Forest for the transaction. JP Morgan Securities Inc. provided advisory services to Forest related to credit and liability management matters. Lehman Brothers Inc. acted as the financial adviser and provided a fairness opinion to Mariner for this transaction. Legal advisers included Vinson & Elkins LLP and Weil, Gotshal & Manges LLP for Forest and Baker Botts LLP for Mariner.

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