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Announcement:

MOODY'S AFFIRMS FOREST OIL'S Ba3 SENIOR UNSECURED RATING; SGL-2 LIQUIDITY RATING; OUTLOOK REMAINS NEGATIVE

12 Sep 2005
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 third-party lenders.

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 million.

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 2005.

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 excluding leases.

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.

New York
John Diaz
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Andrew Oram
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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