Despite previously announced intentions to find a partner to help develop its Eagle Ford Shale acreage, Denver-based Forest Oil Corp. said it has identified a “go-it-alone plan that is attractive to the company.”
As recently as late June, management had said doing a deal in the Eagle Ford was a top priority of interim CEO Patrick R. McDonald. Last week he touted the results of recent wells in the South Texas play “The strong results from these wells in our Eagle Ford acreage position give us confidence we have an economic and attractive oil play, While discussions continue with parties interested in our Eagle Ford asset, we have identified a go-it-alone plan that is attractive to the company and should allow us to hold approximately 40,000 net acres. We can then look to monetize a portion of the remaining acreage through small divestitures or farm-outs.”
Without a joint venture (JV) partner, Forest plans to hold 40,000 net Eagle Ford acres with a 100% working interest over the next several years, initially with two rigs and eventually with three rigs, the company said. This acreage position has 500 total locations identified based on 80-acre spacing. Employing a two-rig program and the current schedule of drilling and well completions, net sales volumes from the Eagle Ford are expected to exit the year at 3,000 boe/d, from a second quarter 2012 average production rate of 1,000 boe/d, the company said.
Forest’s Eagle Ford drilling is focused in the central fairway of its acreage, where the company has experienced the most consistent results and has the largest, most contiguous block of acreage. “This approach provides the opportunity to maximize drilling efficiencies, while further reducing the average well cost below $6 million as the program incorporates pad drilling.” Recent wells in the central fairway meet or exceed Forest’s type curve, which projects an estimated ultimate recovery of 300,000 boe, with a pre-tax drilling rate of return of about 25% based on a $80/bbl West Texas Intermediate crude prices and a $6 million well cost.
Forest said it intends to fund the Eagle Ford program and reduce overall capital spending rates by cutting capital from lower-return liquids projects in East Texas and the Texas Panhandle area. By the fourth quarter, in addition to the two rigs running in the Eagle Ford, Forest will have two rigs running in the Panhandle, down from five currently, targeting the Hogshooter and other oil intervals, and one rig running in East Texas targeting liquids intervals, down from two currently.
Second half 2012 capital expenditures are estimated to be $1900210 million, down from an estimated $435 million in the first half of the year. By the fourth quarter the capital spend run rate is expected to be about equal to expected cash flow based on current commodity prices.
“Our thesis was predicated on Forest shifting capital, JV or no JV, to the oil-rich Eagle Ford from dry-gas and NGL [natural gas liquids]-rich plays, said Canaccord Genuity analysts in a research note. “In a sense, this is happening. Forest has cut its East Texas drilling plan to one rig from two and reduced planned Panhandle activity to two rigs from five. Eagle Ford activity has increased from one rig to two rigs. Unfortunately, we believe the reduction in capital spending overwhelms the strategy shift and leads to a negative impact.”
However, cutting spending is key to righting the company’s balance sheet, management said. “Adjusting the capital spending rate is the first step in improving the company’s financial strength and flexibility,” McDonald said. “Over the coming months, we will proceed with additional steps by identifying and selling non-reserve based and non-core assets. In our core areas where we have reduced capital spending, our acreage is held by production; therefore, we can return to those areas with a more aggressive development program in a more robust commodity price environment.”
It looks as if longer-term, the company’s plan is to shore up the balance sheet and prove up additional Eagle Ford and maybe Permian (Delaware) acreage, said Wells Fargo Securities analysts in a note. “…[A]t that point, Forest’s board should then entertain offers for a corporate sale, presumably from a higher share price level. After incorporating new guidance, our 2012 and 2013 EPS move to 49 cents and 53 cents from 61 cents and 69 cents, respectively.”
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