Denver-based Forest Oil Corp. has agreed to purchase anotherindependent producer, Forcenergy Inc., for $615 million in stock, amove that is expected to significantly boost the new company’soperations in the Gulf of Mexico, Alaska and Canada.

Forest will exchange 1.6 shares, equal to $25.60 at close onFriday (July 7), for each Forcenergy share, a 21% increase over itsFriday closing price. Following the takeover expected this fall,Forest investors will own 56% of the new Forest Oil Corp., whileForcenergy shareholders will own 44%. Forest Oil will continue tobe headquartered in Denver, and initially will have approximately48 million shares outstanding with a market capitalization of morethan $1.5 billion, based on Forest’s closing price of $16.00 pershare 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 expansionin “frontier exploration areas” like Alaska and Canada, said CEORobert Boswell. Boswell, who joined Forest in 1995. He notedForest’s long-term plan was to build a company valued between $1billion 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 threegoals: maximize its production in the Gulf of Mexico; grow thecompany’s value in the Canadian Foothills and Northwest Canada; andredeploy cash flow from ongoing operations to begin more frontierexploration in Alaska, Canada and on an international level.

“This combination meets Forest’s criteria of strategic fit. Itplaces the company in one of North America’s highest potentialfrontier exploration areas in Alaska with an established platformof expansion,” Boswell said. “It significantly increases thecompany’s position in the Gulf of Mexico where Forest hashistorically achieved its highest rates of return and it willenable the company to capture additional opportunities as well ascost savings.”

An increased cash flow from the merger is expected to helpForest fund its growing portfolio of “high impact exploration anddevelopment 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 willcontribute 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 immediateattention on the Gulf of Mexico. Here, Forcenergy brings in a”significant asset base” that was underutilized when Forcenergyexperienced financial problems in 1998 and 1999 and had toreorganize (see Daily GPI, March 25, 1999; Nov. 29, 1999; Jan. 21, 2000). Low oil prices in 1998 forced the debt-riddenForcenergy to reduce drilling in the Gulf, and this is an area thatForest is expected to immediately rejuvenate.

With continued drilling in the Gulf of Mexico, the new companywill become one of the largest operators on the shelf. Developmentin the Canadian Foothills and the Liard Plateau in the NorthwestTerritories also is expected to grow. Management also hasidentified more growth opportunities in the existing onshorefields.

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

Shareholders are expected to vote on the merger in the next fewmonths, while directors at both companies have unanimously approvedit. Boswell will remain CEO of Forest and Forcenergy, while CEORichard Zepernick will become Forest’s new president.

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