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
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.
Corporate Finance Group
Moody's Investors Service
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service