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Rating Action:

MOODY'S ASSIGNS Ba3 TO FOREST OIL SR. UNS. NOTES; CONFIRMS RATINGS

22 Apr 2002
MOODY'S ASSIGNS Ba3 TO FOREST OIL SR. UNS. NOTES; CONFIRMS RATINGS

Approximately US$1.225 Billion of Debt Securities and Bank Facilities Affected.

New York, April 22, 2002 -- Moody's Investors Service took the following rating actions on behalf of Forest Oil Corporation (FST). With a stable rating outlook, Moody's:

i) Assigned a Ba3 rating to its $150 million of 7.875% senior unsecured 12-year notes.

ii) Confirmed a Ba3 rating on its existing senior unsecured notes.

iii) Confirmed a Ba2 senior implied rating.

iv) Confirmed a Ba1 for its $600 million senior secured revolver.

v) Confirmed its B1 senior subordinated note ratings.

Proceeds will repay roughly $108 million of secured bank debt, purchase approximately $15 million the 10.5% senior subordinated notes, and fund capital outlays. The $600 million secured revolver will be undrawn upon closing of the offering. Moody's estimates FST's pro-forma debt to currently be roughly $700 million versus $594 million at year-end 2001. FST guarantees Canadian Forest Oil's (CFOIL); CFOIL does not guarantee FST debt.

The Ba1 bank debt rating is one notch above the Ba2 senior implied rating due to ample coverage by roughly 80% of FST's reserves. The notching of the Ba3 senior notes below the senior implied rating reflects: (1) their effective subordination to a large potential overhang of secured debt permitted by the senior indentures for the greater of $600 million or $150 million plus 25% of net tangible assets, (2) a view that the scale of the carve out may be needed for development costs on long-lead time projects and/or opportunistic acquisitions, (3) reduced junior capital under the notes; and (4) lack of a guarantee from increasingly important CFOIL.

The sector is acquisition prone and both FST and its major shareholder are skilled in opportunistic acquisitions and Moody's expects FST's 2002 capital spending to be at the higher end of its $250 million to $350 million estimate. As structured, the bank revolver's Debt to EBITDA covenant currently limits revolver debt to $385 million ($235 million the offering).

The ratings are supported by: FST's early 2003 prospects for bringing potentially sizable, longer-lived Redoubt Shoal production on line and its proven undeveloped (PUD) reserves to proven developed (PD) status; FST's reasonable scale for the rating; intensive Gulf of Mexico (GOM) reserve and infrastructure positions and long GOM operating history; and diversified long-term potential across four existing operating basins. If Redoubt Shoal continues to meet delineation and appraisal expectations and roughly meets initial and full-year 2003 production expectations, FST's leverage on PD reserves, book capital, and cash flow may improve substantially, depending on trends elsewhere in its portfolio and degree of acquisition activity.

The ratings are restrained by: surging debt on PD reserves during the heavy front-end capital spending for Redoubt Shoal; FST's reduced PD reserve scale and higher debt levels since 2000; six sequential quarters of falling pro-forma production, partly due to heavy capex devoted to longer-lead time areas, some cash flow diverted to debt reduction; and asset sales; expected production declines of 15% to 20% in 2002; partly due to priority front-end spending on Redoubt Shoal; fairly high combined unit production, G&A, interest, and finding and development costs for the rating; reliance on short-lived GOM production for roughly 67% of cash flow; and the inexorable reinvestment and risk pressures of short GOM production.

At a time when FST is long on opportunity in the form of long-lead time, higher risk, cash absorbing exploration plays, the ratings are also restrained by: a high concentration of GOM cash flow in a handful of flush but short-lived GOM wellbores and a below average reserve life on PD reserves. Until FST brings a new longer-lived core area to production, Moody's believes material organic volume growth may be hard to maintain. GOM drilling successes have mounted but volumes found per new success have tended to decline, affecting the volumetric half-life of a typical new wellbore in shallow GOM waters.

Regarding Redoubt Shoal, an additional reason for restraint is the need to observe exploration efforts (very promising so far), development and completion progress, and the nature of 2003 production response, unit production costs, and development costs associated with that high impact exploration, development, and waterflood project.

Redoubt is a "dead oil" reservoir, containing negligible natural gas in solution and exhibiting low reservoir pressure. FST expects the need for assisted lift (submersible pumps, eventually assisted by gas lift) and waterflooding to push lifting costs into the region of $6/barrel. Production history will reveal eventual cost trends. Production will be sold to one refinery in the Anchorage area. FST hopes to retain the current $2.50/barrel discount off the NYMEX benchmark that refiner pays for FST's current 9,000 barrels/day of Cook Inlet production and receive the same for Redoubt's expected 15,000 barrels/day of production.

Front-end spending for Redoubt and the 2001 repurchase of $56 million in common shares has pushed debt to record levels of roughly $700 million, even after $150 million in cash from asset sales. Total present debt on year-end 2001 PD reserves is high for the Ba2 senior implied rating, relative to the economics and scale of FST's reserve base, but this is bridging to first production from Redoubt Shoal and to developing more of its reserves to PD status. Moody's expects debt levels could end the year around $700 million to $750 million, but the ratings assume Redoubt Shoal PD reserve growth and production justify the ratings.

With 2002 unit interest expense rising during 2002, Moody's believes FST requires price realizations of roughly $18/boe to $19/boe to cover its combined unit production, G&A, interest, and three-year average reserve replacement costs. Moody's believes these costs may moderate over time, particularly when Redoubt production kicks in, but healthy natural gas prices would be needed until then to internally fund FST's capital spending budget.

Annualized fourth quarter 2001 production yields a reserve life of 5.6 years on PD reserves and 9.2 years on total reserves. PD reserves fell but total reserves rose, relative to production. FST's GOM production has roughly a 3.7 year PD reserve life and much lower proven developed producing reserve life, though it has sustained this profile for many years. Still, it reduces FST's capacity to absorb failures, development delays, shut-ins due to infrastructure problems, and or trough cash flow pressures without affecting production trends.

Moody's estimates that 2002 EBITDA will be in the range of $230 million to $280 million, depending on production and price trends. Capex for 2002 is budgeted for $250 million to $350 million; Moody's assumes the high end of that range. First quarter 2002 spending appears to have been at a $300 million annual pace.

Interest expense should be in the range of $50 million to $55 million, versus $50 million in 2002. FST has swapped $300 million of its senior notes to low floating rates and it has retired $155 million of higher coupon subordinated debt.

Moody's estimates currently existing debt on year-end 2001 PD reserves to be up sharply to $4.45/boe and total debt plus capex to bring PUD and PDNP reserves to production and plugging and abandonment costs to equate to higher too at about $4.70/boe of total reserves. Assuming Redoubt reaches production before year-end 2002, bringing significant PUD reserves to PD status, and assuming FST at least replaces its 2002 production, Debt/PD reserves by year-end 2002 could fall by roughly $1/boe.

Fourth quarter 2001 realized prices equaled $17.73/boe. Full-cycle costs included $7.09/boe of production costs and severance tax, $2.30/boe of gross G&A costs (including $21.5 million of capitalized G&A), $1.74/boe of gross interest, and roughly $7/boe of 3-year average reserve replacement costs. Unit interest expense has since risen materially.

After deducting capitalized G&A, pro-forma EBITDAX/Interest for fourth quarter 2001 was 3.6x and annualized fourth quarter EBITDAX covered pro-forma annualized interest plus three-year average reserve replacement capex by only 0.9x.

FST's very flush, low lifting cost GOM production can give its margins, net income, book leverage ratios, and EBITDA coverage ratios a disproportionately sharp boost during up-cycle prices. However, FST's high depreciation charges due to high reserve replacement costs, cut the other way during weaker prices. Thus, after the strong price years of 2000 and the first half of 2001, debt to total capital strengthened from 54% at year-end 1999, to 42% by year-end 2000, to 39% at year-end 2001, but has since weakened significantly.

Moody's confirmed FST's: Ba1 rating on FST's and CFOIL's combined $600 million senior secured bank revolver; Ba3 senior unsecured ratings for $264 million of 8% notes due 2008 and $160 million of 8% notes due; and B1 ratings for FST's $87.6 million of 10.5% senior subordinated notes due 2006 and CFOIL's $65 million of 8.75% notes due 2007.

Forest Oil Corporation is headquartered in Denver, Colorado.

New York
Robert N. McCreary
Senior Vice President
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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