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,
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
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
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
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.
Robert N. McCreary
Senior Vice President
Corporate Finance Group
Moody's Investors Service
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service