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Forest Oil Enters Cotton Valley, Reports 32% 4Q Profit Growth

Forest Oil Corp. said it will pay about $255 million for producing assets, including about 26,000 acres, mainly in the Cotton Valley play of East Texas. The 110 Bcfe of estimated proved reserves (43% proved developed, 90% natural gas) produced about 13 MMcfe/d in January, and the Denver-based company said it expects to double production by the end of 2007.

"Most of this area of the Cotton Valley play has been approved for 40 acre down-spacing with the locations yet to be drilled," said Forest CEO H. Craig Clark. "It is another tight gas basin acquisition with a good acreage position that has similar completion techniques to Buffalo Wallow and Wild River. This asset base will give us another significant multi-year, multi-rig development drilling program and will increase both the size and quality of our onshore North American asset base and provide an additional core growth area to our Southern Business Unit following the offshore spinoff."

Forest said it will continue a two-rig program in the area during 2006, increasing to a four-rig program in 2007. The company has identified 300 drilling locations, requiring an estimated $1.6-2 million to drill and complete each well. Estimated recovery is 1.2 to 1.3 Bcfe per well with production expenses of less than $1.00 per Mcfe.

Forest is acquiring the assets from six private entities; the transaction is scheduled to close March 31. Almost a year ago Forest announced the acquisition of its interest in the Buffalo Wallow field through the $200 million cash (plus $30 million debt) purchase of a private company with an 83% average working interest in the Texas field (see NGI, March 7, 2005).

The Denver-based company is repositioning its portfolio to focus oil and natural gas operations onshore. Last week Forest reported profits were up 32% in 4Q2005 to $57.2 million (90 cents/share) from $43.6 million (72 cents) a year earlier. For the year, Forest reported net earnings of $151.6 million ($2.47/share), a 24% increase from $122.6 million ($2.15) in 4Q2004.

Last September, Forest spun off its extensive offshore Gulf of Mexico operations -- about 21% of its reserves -- and merged those offshore assets with a subsidiary of Mariner Energy Inc. in a stock-for-stock transaction (see NGI, Sept. 19, 2005). After the spin-off and merger is completed in early March, Mariner will be a separately traded public company that will own and operate the combined businesses of Mariner's and Forest's Gulf operations. Forest's remaining onshore operations will be operated by subsidiary Remainco.

"[Last year] was a pivotal year for Forest as we were able to complete the repositioning of our portfolio, while arranging a substantial dividend to our shareholders," Clark said. "Our transaction with Mariner Energy, in addition to our recent onshore acquisitions, creates two attractive portfolios for our shareholders."

The independent replaced 281% of its remaining onshore assets last year at an all-in finding, development and acquisition cost of $2.16/Mcfe. Its East Texas Cotton Valley acquisition, "essentially replaces reserves for 2006 and provides another growth area with both near-term and future impact," Clark noted.

In 4Q2005, Forest's sales volumes dropped 23% from a year earlier to 386.4 MMcfe/d. Impacts from last year's hurricanes deferred 10 Bcfe (109 MMcfe/d), of which .7 Bcfe (8 MMcfe/d) related to Forest's onshore assets in Remainco. Remainco's production volumes averaged 282.7 MMcfe/d in 4Q2005, an increase of 7% from 4Q2004.

For the year ended Dec. 31, 2005, Forest's sales volumes were 452.7 MMcfe/d, off 4%, with storm-related downtime reducing volumes by 16 Bcfe (44 MMcfe/d) for all of 2005. Remainco production volumes averaged 272.4 MMcfe/d in 2005, an increase of 9% from 2004.

At year-end 2005, about 70 MMcfe/d of Gulf net production remained shut-in by Katrina and Rita. As of mid-February 45 MMcfe/d remained shut-in, mostly because of repairs still necessary to platforms. as well as third-party transportation and processing facilities and infrastructure.

"The timetable for restoring full production is uncertain as it is dependent on repairs to third party facilities," the company said in a written statement. Total production associated with the Gulf operations deferred for Katrina and Rita during 4Q2005 was 9.3 Bcfe; total production deferred in the final two quarters of 2005 was 14.9 Bcfe.

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