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Rating Action:

MOODY'S ASSIGNS Ba3 TO FOREST OIL'S SENIOR UNS. NOTES; CONFIRMS Ba2 SENIOR IMPLIED, Ba1 BANK LOAN, B1 SENIOR SUB. NOTE RATINGS

10 Dec 2001
MOODY'S ASSIGNS Ba3 TO FOREST OIL'S SENIOR UNS. NOTES; CONFIRMS Ba2 SENIOR IMPLIED, Ba1 BANK LOAN, B1 SENIOR SUB. NOTE RATINGS

Approximately $1.2 Billion of Debt Securities and Bank Facilities Affected

New York, December 10, 2001 -- Moody's took the following rating actions for Forest Oil Corporation (FST):

- Assigned a Ba3 rating to FST's $160 million of 8% senior unsecured notes due 2011.

- Confirmed FST's Ba2 senior implied rating.

- Confirmed a Ba1 rating for FST's and Canadian Forest Oil's (CFOIL) combined $600 million senior secured bank revolver.

- Confirmed FST's Ba3 rating for its $264 million of 8% senior unsecured notes due 2008.

- Confirmed B1 ratings for FST's $96 million of 10.5% senior subordinated notes due 2006 and CFOIL's $67 million of 8.75% notes due 2007.

FST guarantees CFOIL debt. CFOIL does not guarantee FST debt. Pro-forma for debt repayment from proceeds of the note offering and from proceeds of $116 million in recent asset sales, the revolver would be undrawn.

The Ba2 senior implied rating is stable. The Ba3 note rating is positive, depending on the degree to which FST might fund acquisitions with secured debt permitted by the large secured debt carveout in its senior note indentures. The sector is acquisition prone, FST's portfolio would benefit from key additions, Moody's views FST's acquisition appetite as potentially material to the notching situation, and both FST and its controlling shareholder are skilled in opportunistic purchases in downcycle environments. The use of material equity or unsecured debt to fund acquisitions may contribute to moving the note rating to the senior implied level.

The ratings are supported by FST's reasonable scale, intensive Gulf of Mexico (GOM) reserve and infrastructure positions, very long history operating in the GOM, diversified longer term reserve replacement potential across four existing operating basins and a frontier position offshore South Africa, and expected reduced leverage on reserves in the 2003 timeframe. After surging by over $130 million in 2Q01 and 3Q01 to fund exploration and development outlays, pro-forma 9/30/01 debt of $590 million is now about $30 million below year-end 2000 levels after repayments principally with proceeds from the sale of 4% of its reserves to Unocal.

Pro-forma debt on pro-forma 12/31/00 reserves is in ranges acceptable for the Ba2 senior implied rating relative to the economics and scale of FST's reserve base. However, Moody's expects debt levels to rise in the range of 15% to 20% from current levels by year-end 2002 to cover FST's spending budget. The current expectation is that 2003 reserve growth and scheduled Redoubt Shoal production would support the ratings. Except for Redoubt Shoal, FST plans to hold 2002 capex for each of its operating areas to levels covered by each area's cash flow. Generally, the GOM is a net cash contributor to FST's growth initiatives elsewhere.

The ratings are restrained by: higher combined unit production, G&A, interest, and finding and development costs; reliance on short-lived GOM production for 67% of cash flow; four sequential quarters of pro-forma production decline due to heavy capex devoted to longer-lead time areas; some cash flow diverted to debt reduction; the fact that Canadian production gains have not met expectations; the inexorable reinvestment and risk pressures of short GOM production; and expected production declines in 2002 until Redoubt Shoal start-up.

FST's current total unit operating, interest, and reserve replacement cost pattern may not be fully compatible with the Ba2 senior implied rating at trough conditions. Still, the ratings benefit from likely improvement as the impact of Redoubt Shoal development spending on reserve replacement costs falls, and its production responds to waterflood procedures, as well as from the ongoing assistance of the Anschutz Corporation in effecting strategic acquisitions.

At a time when FST is long on opportunity in the form of long-lead time, higher risk, cash absorbing exploration plays in the Cook Inlet, Northern Canada, and offshore South Africa, the senior implied rating remains restrained by: the concentration of 67% of FST's cash flows from short-lived GOM reserves with associated higher reinvestment risk and high spending pace to replace production; a high concentration of GOM cash flow in a hand full of flush but short-lived GOM wellbores; significant leverage on proven developed (PD) reserves and significant debt plus full development and abandonment capex on total reserves; and a fairly short reserve life on total 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.

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, if drawn. The notching of the Ba3 senior unsecured notes below the senior implied rating reflects: (1) the notes' effective subordination to a potentially large overhang of secured debt due to note indenture covenants carving out room for secured debt the greater of $600 million or $150 million plus 25% of consolidated net tangible assets, (2) a view that the scale of the secured debt is designed for front-end development costs of long-lead time projects and for acquisitions, (3) reduced junior capital under the notes; and (4) the lack of a guarantee from increasingly important CFOIL.

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 in the near term is the need to observe forthcoming exploration efforts and the nature of 2003 production response, unit production costs, and unit finding and development costs, associated with that important exploration, development, and waterflood project. This production is expected to be mainly sold to one refinery operating in the Anchorage area.

In 3Q01, price realizations of $20.26/boe covered FST's combined unit production, G&A, interest, and three-year average all-sources reserve replacement costs of $18/boe (including three-year average reserve replacement costs). Moody's believes these costs will moderate over time, but healthy natural gas prices would be needed to cover such cost patterns to internally fund a full reserve replacement capex budget. Run-rate 3Q01 full-cycle costs included $7.29/boe of production costs and severance tax, $1.82/boe of gross G&A costs, $1.71/boe of gross interest expense, and over $7/boe of 3-year average reserve replacement costs.

Moody's expects year-end 2001 average unit full-cycle costs in the range of $19/boe. High sector drilling and services costs for most of 2001, FST's substantial development spending in several basins, and year-end 2001 oil and gas prices will be reflected in FST's year-end 2001 reserve replacement costs, which Moody's expects to be in the range of $9 to $10/boe.

FST reported a 6.4% production decline in 3Q01 from pro-forma 3Q00 and a 1% decline from pro-forma 2Q01. Production suffered from gas gathering and processing constraints, steep natural declines on key properties, and the 2001 capex mix indicate flat-to-modest 2001 volume gains. Annualized 3Q01 production yields a reserve life of 5.5 years on PD reserves and 8.1 years on total reserves. FST's GOM production has roughly a 3.7 year PD reserve life and lower proven developed producing reserve life. However, FST has been able to sustain this profile for many years, but it does reduce the capacity to absorb failures, delays, shut-ins, and or trough cash flow pressures without affecting production trends.

Capex for 2001 is budgeted for $550 million, 2001 interest expense could be in the range of $50 million, and Moody's estimates about $500 million of 2001 EBITDA. After deducting, capitalized G&A, EBITDAX/Interest for 3Q01 was 6.5x, but 2001 EBITDAX coverage of interest plus three-year average reserve replacement capex for 2001 would in the range of 1.5x.

Pro-forma, Moody's estimates total debt on PD reserves at $3.75/boe, and total debt, plus capex needed to bring PUD and PDNP reserves to production, plus plugging and abandonment costs to equate to about $4.75/boe of total pro-forma reserves. These figures may improve by year-end, assuming FST's reserves meet current 12/31/01 estimates. Pro-forma 9/30/01 debt to total capital strengthened from 42% on 12/31/00 to 38% due to earnings retention during extraordinarily high natural gas and oil prices.

Forest Oil Corporation is headquartered in Denver, Colorado.

New York
Michael Rowan
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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