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Forest Focuses on Granite Wash, Haynesville, Swings to 2Q Profit

Cost cutting as a result of reduced drilling led Forest Oil Corp. to swing to a 2Q2009 profit of $37.1 million (36 cents/share) after posting a loss of $68 million (minus 78 cents/share) during 2Q2008. While the company reduced its drilling investment, management said for the remainder of the year the Denver-based company will focus its resources on its promising acreage in the Haynesville Shale and the Granite Wash.

Without the effects of one-time items, Forest's adjusted net earnings for 2Q2009 were $53.6 million (52 cents/share), down 60% compared to 2Q2008 adjusted net earnings of $135.1 million ($1.51/share).

"The second quarter results were in line with our expectations from a production perspective and better than expected from a cost perspective," said CEO H. Craig Clark. "We significantly reduced our drilling investment and our rig count in response to our near-term view on domestic natural gas prices. The result was substantial free cash flow in the quarter."

During the company's earnings conference call CFO David Keyte said Forest's production strategy going forward is tied to natural gas prices. "We continue to be cautious on drill bit spending as drilling and service costs continue to fall and visibility to recovery of natural gas prices continues to elude us," he said. "Production for the second quarter was 521 million equivalents a day [MMcfe/d], up 3% compared to second quarter of last year."

Keyte added that Forest will continue to look for ways to boost its bottom line. "We continue to target significant asset sales to improve our asset quality and delever the balance sheet," he said.

Looking to the second half of 2009, Clark said horizontal drilling has unlocked the potential of its acreage in the Granite Wash of the Greater Buffalo Wallow Area in the Texas Panhandle. He said the company has extensive resource opportunities in the multiple-pay horizons in the play, which Forest has pursued from both a vertical and most recently from a horizontal perspective. Clark added that he believes horizontal drilling in this area will produce favorable economics compared to other plays in North America. Forest completed its first operated horizontal well in the play in April, which produced into the sales line at a rate of 17 MMcfe/d. This well has averaged 7.8 MMcfe/d since its initial production.

The company is also continuing its focus on shale, where its second horizontal Haynesville Shale well in Red River Parish, LA, during the second quarter produced into the sales line at a rate of 20.3 MMcfe/d. This well has averaged 14.6 MMcfe/d since its initial production (see NGI, July 20).

"For the remainder of the year, we will focus our efforts on the Haynesville Shale in East Texas and Northern Louisiana and the Granite Wash in the Greater Buffalo Wallow Area of the Texas Panhandle," said Clark. "Both areas have high quality assets that we feel can be more efficiently exploited with a higher rig count when project economics improve. In the meantime, we will continue to refine drilling and completion processes in these areas, with the intent to increase activity with a focused drilling effort when conditions improve. We will also continue to delever the balance sheet through asset divestitures and free cash flow."

Addressing the supply glut that has kept downward pressure on prices over recent months, Clark said he sees the extra gas dissipating over the remainder of the year. "U.S. gas supply may see a 500 million [cubic feet] per day... or half a [billion cubic feet] per day decline each month for the rest of 2009, solving the imbalance with demand by year-end, rebounding in 2010," he told analysts during the call.

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