MOODY'S AFFIRMS FOREST OIL'S Ba3 SENIOR UNSECURED RATING; SGL-2 LIQUIDITY RATING; OUTLOOK REMAINS NEGATIVE
Approximately US$700 Million of Debt Securities Affected
New York, September 12, 2005 -- Moody's Investors Service affirmed Forest Oil's (FST) Ba3 senior
unsecured note rating, its Ba3 Corporate Family Rating, and
its SGL-2 liquidity rating. The rating outlook remains negative.
These actions follow FST's announcement today of a pending (1)
spin-off of FST's Gulf of Mexico (GOM) reserves to Spinco
and Spinco's subsequent immediate acquisition by Mariner Energy
(unrated) and (2) FST's pending $200 million debt reduction
with cash distributed by Spinco upon its borrowing a like amount from
Moody's retained the negative outlook pending FST delivering on
its intention to materially reduce debt from cash flow by year-end
2005 (in addition to the pending $200 million debt reduction associated
with the divestiture). However, FST's ability to improve
to a stable outlook relies on significantly reduced net debt by year-end
2005 and on the quality of year-end 2005 reserve replacement and
reserve replacement cost results. It is feasible that pro-forma
year-end 2005 debt could be in the range of $625 million,
down from a pro-forma June 30, 2005 estimate of $718
FST would also need to demonstrate an increased proportion of pro-forma
proven developed reserves relative to pro-forma debt and stable
to rising pro-forma production at sound unit full-cycle
economics. Going forward, Moody's would also expect
that material acquisitions would be adequately funded with common equity.
Generally, while certain pro-forma metrics would deteriorate,
other key metrics remain in an acceptable range given historic sector
cash flows, FST's intention to reduce leverage, and
likely reduced reinvestment risk. The ratings affirmation reflects
our view that the divestiture considerably facilitates FST's turnaround
effort, its ability to demonstrate more favorable quarterly results
to the market, reduced sustaining capital spending and reinvestment
risk, and expected significant actual debt reduction by year-end
Given FST's full leverage, the ratings could suffer if FST
conducted leveraging acquisitions; conducted material shareholder-friendly
transactions, or could not mount sustained favorable operating and
cost trends. The ratings remain restrained by full leverage on
proven developed reserves, a considerable pro-forma rise
in total debt per unit of daily production, acquisition event risk,
and the need to demonstrate positive operating trends.
Today's actions are supported by several factors.
- While the GOM reserves generate 46% of FST's production,
they are very capital intensive given their inherent very short reserve
life and comparatively high reserve replacement costs. The GOM
divestment signals FST's intention to carry out its growth plan
onshore with longer lived, though lower margin, reserves.
- While the transaction reduces reserves by 24% but debt
by only 21%, the difference is not highly material to the
ratings, expected net leverage on pro-forma year end proven
developed (PD) reserves rises modestly, and the pro-forma
PD reserve life lengthens markedly.
- While FST's unit production and G&A expenses will rise
due to divestiture of flush production, the resulting lower production
rate of pro-forma reserves, the higher unit costs of pro-forma
production, and a reduced cash margin also would face a lower level
of pro-forma reinvestment risk.
Pro-forma for 2005 acquisitions, year-end 2004 reserves
totaled 242 mmboe, of which 181 mmboe was PD reserves. Second
quarter 2005 production was 81,965 boe per day. FST reports
that its pro-forma 2004 proven reserves would total approximately
185 mmboe, of which 137.7 mmboe would be PD reserves.
Pro-forma production would decline approximately 46% to
44,500 boe per day. Total debt would decline only roughly
22% ($200 million) to approximately $718 million.
Moody's estimates that pro-forma Lease Adjusted Debt/PD
BOE of reserves would rise from $5.56/PD BOE of reserves
at June 30, 2005 (pro-forma for the Buffalo Wallow acquisition)
to roughly $6.10/PD BOE ($5.21/PD BOE excluding
leases) pro-forma for the divestiture. Including net debt
reduction expected by year-end 2005, we estimate that pro-forma
net Lease Adjusted Debt/PD BOE could be in the range of $5.50/PD
BOE ($4.55/PD BOE of reserves, excluding leases).
The debt burden per unit of daily production would increase after the
divestiture due to the major reduction in production. However,
the PD reserve life of that production would be substantially longer,
rising from approximately 6 years to somewhat less than 9 years,
and the value of that long-lived production stream would be higher
than the divested short-lived production. Lease Adjusted
Debt/BOE of daily production would increase from $12,430/BOE
to a pro-forma $18,760/BOE ($16, 135/BOE
excluding leases) at June 30, 2005 or a possible $17,100/BOE
of net debt on daily production by year-end 2005 ($14,000/BOE
While FST will have to demonstrate this over time, we believe FST's
pro-forma sustaining capital spending will decline very substantially,
reserve replacement costs will be less event prone, and FST should
carry reduced reinvestment risk. FST's ability to sustain
pro-forma production would no longer be heavily impacted by drilling
success of single, or a small number, of flush GOM wells or
production problems inherent to the GOM.
Pro-forma liquidity would continue to be sound. We anticipate
that FST would have an undrawn secured borrowing base revolver in the
range of $600 million. After the GOM divestiture,
and using FST's second quarter 2005 price realizations, we
anticipate that its leveraged cash flow would cover sustaining capital
spending by roughly 140% to 160%, reflecting higher
unit production, G&A, and interest expenses but lower
expected unit reserve replacement costs. This can only be borne
out by FST's 2005 and 2006 onshore reserve replacement cost experience.
We assume that total pro-forma cash flow would be internally funded.
Moody's estimates that 2005 EBITDA will be in the $700 million
to $750 million range, interest expense in the $60
million range, and capital spending (excluding 2005 acquisitions)
in the $425-475 million range. We anticipate that
total 2005 capital spending, excluding acquisitions, would
be internally funded.
Moody's ratings actions today include:
i) Affirmed FST's Ba3 Corporate Family Rating.
ii) Affirmed FST's Ba3 senior unsecured note ratings.
The lack of a rating notch between the unsecured notes and the Corporate
Family Rating continues to reflect a low expected level of secured debt.
Forest Oil Corporation is headquartered in Denver, Colorado.
Corporate Finance Group
Moody's Investors Service
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service