MOODY'S ASSIGNS Ba3 TO FOREST OIL'S SR. UNSECURED NOTES; AFFIRMS Ba3 SR. IMPLIED RATING & Ba2 SR. SECURED BANK RATING; NEGATIVE RATING OUTLOOK
Approximately US$1.275 Billion of Debt Securities and Bank Facilities Affected.
New York, July 07, 2004 -- Moody's assigned a Ba3 rating to Forest Oil's (FST) pending $100
million of senior unsecured add-on notes due 2011, under
FST's existing 8% senior unsecured note indenture.
Proceeds will repay a like amount of senior secured bank revolver debt,
which would be redrawn to fund FST's planned July 30, 2004
call of the Wiser Oil 9.5% senior subordinated notes.
Moody's also affirms FST's Ba3 senior implied rating and existing
note ratings. The rating outlook remains negative, pending
attainment of FST's delivery of targeted debt reduction, sound
sequential quarter production trends, and substantially reduced
reserve replacement costs by year-end 2004.
The ratings reflect: escalated leverage on reserves after:
FST's early 2004 negative revision of 30% of its reserves
and completion of the historically expensive Wiser Oil acquisition;
the pressures of a high concentration of short-lived reserves;
and FST's need to reduce very high reserve replacement costs.
On the positive side, FST targets significant 2004 leverage reduction
and Moody's expects both pro-forma production to rise from
first quarter 2004 levels and be delivered into very strong 2004 prices.
The lack of a rating notch between the unsecured notes and the senior
implied rating reflects expected substantially reduced secured debt by
year-end 2004, which would sharply reduce the notes'
effective subordination to secured debt. In its June 2, 2004
press release that downgraded FST's senior implied rating to Ba3
from Ba2, Moody's noted that to avoid a re-notching
of the notes, FST needs to reduce secured debt to less than $100
million to $150 million by year-end and thereafter adequately
fund capital spending from cash flow and adequately fund acquisitions
with common equity. Upon the 36% equity-funded $330
million Wiser acquisition, FST's bank borrowing base was set
at $480 million.
The rating outlook is negative pending delivery of: at least $175
million to $200 million of post-acquisition gross debt reduction
this year; post-asset sale cash flow and reserve profile supportive
of the existing ratings; improved capital productivity (lower reserve
replacement costs); favorable production trends; and reduced
year-end 2004 leverage on proven developed (PD) reserves to in
the range of $4.50/PD boe of reserves. The latter
goal is all the more relevant since reported reserves are almost 10%
higher than third party engineering estimates. Moody's will
track sequential quarter production and cost trends, acquisitions
and funding, and share buyback activity.
FST's ratings and outlook suffered from its larger-than-expected
early 2004 78.8 mmboe negative reserve revision and far lower than
expected level of 2003 drillbit productivity. The revisions resulted
in lower than expected year-end PD reserves, in spite of
two significant 2003 acquisitions, and drove a large increase in
the proportion of debt relative to the funded, productive,
cash generating PD base of the business.
Year-end Debt/BOE of PD Reserves was $5.72/boe,
falling to $5.45/boe on March 31, 2004 ($5.52/boe
pro-forma for the Wiser Oil acquisition), to the pro-forma
range of $5.30/boe at June 30, 2004, and potentially
falling to the range of $4.80/boe by year-end (assuming
no asset sales and that FST uses all second-half 2004 cash flow
after capital spending to reduce debt).
Wiser's 31.8 mmboe in reserves added measurably to Permian
and Western Canadian Sedimentary Basin holdings FST seeks to intensify.
FST paid $10.38/boe for Wiser's reserves, or
$31,000 per daily producing barrel of oil-equivalent,
and hedged almost 80% of Wiser gas production at $6.18/mmbtu
and 90% of oil production at $35.37/barrel.
However, Wiser had incurred very high 3-year average and
1-year reserve replacement costs ($18.09/boe and
$42.51/boe, respectively); its already high production
costs had escalated sharply in fourth quarter 2003 and first quarter 2004,
and its Western Canadian natural gas reserves (30% of Wiser's
reserves but 50% of its production) tend to be short-lived.
Overall, the ratings remain restrained by: high pro-forma
debt on PD reserves; FST's very high total pro-forma leveraged
full-cycle costs of $30/boe, driven largely by the
Redoubt Shoal negative revision, high Gulf of Mexico (GOM) reserve
replacement costs, and high production costs; Wiser's
history of high reserve replacement costs; FST's very high
2003 drillbit reserve replacement costs of $31.60/boe before
negative revisions and high 3 year average drillbit reserve replacement
costs of $39.74/boe (after revisions). Pro-forma
for Wiser, FST spent $2.050 billion in capital in
2000-2003 yet boosted PD reserves by only 13%, while
production is actually lower than 2000 levels.
Additionally, FST has a relatively short pro-forma PD reserve
life of 5.9 years; a low 39% of 2003 production was
replaced by extensions and discoveries (E&D); FST relies heavily
on short-lived GOM production for more that 60% of pro-forma
cash flow and 59% of production; and will face inexorable
reinvestment and risk pressures in replacing that short lived production
until it gains considerably greater diversification away from the GOM.
However, the ratings are supported by: Very strong 2004 cash
flow with which to reduce debt and fund the full capital budget for reinvestment;
FST's shift to a somewhat lower risk growth-by-acquisition/exploitation
strategy and away from its high cost exploration focus; FST's
adequate scale, basin diversification, long experience in
its core basins, and more diversified pro-forma drilling
inventory; potentially rising 2004 production from three GOM well
completions; Wiser's added infill drilling locations;
hedging of roughly 50% of production at approximately $30/boe;
expected significant debt reduction this year; and the 36%
equity funding for the Wiser acquisition.
FST believes that its GOM discoveries at Vermillion Block 102, Eugene
Island 273, and West Cameron will add substantially to second and
third quarter 2004 production.
For several years, Moody's had restrained FST's note
ratings due to concerns about ultimate Redoubt Shoal productivity,
FST's high reserve replacement costs, its reserve portfolio
risk imbalances arising from a very high 67% pre-Wiser proportion
of production coming from short lived GOM reserves, and by FST's
historic inability to mount drilling programs of sufficiently sustained
scale and productivity to consistently offset steep GOM production declines.
Moody's ratings actions today include:
i) Assigned a Ba3 rating to a pending $100 million of senior unsecured
ii) Affirmed a Ba3 Senior Implied Rating.
iii) Affirmed the Ba3 existing senior unsecured note ratings for FST's
$150 million of 7.75% notes maturing 2014,
$160 million of 8.00% senior unsecured notes due
2011, and $265 million of 8.00% notes due 2008.
iv) Affirmed the Ba2 rating on FST's $600 million senior
secured revolver ($480 million pro-forma borrowing base).
v) Affirmed the Ba3 Senior Unsecured Issuer Rating.
Moody's estimates that 2004 cash flow will be in the $550
million to $580 million range, interest in the $60
million to $65 million range, and capital outlays in the
$650 million range, including the Wiser acquisition (funded
by $120 million of new equity, $125 million of assumed
debt, and $85 million of new bank debt). This indicates
that second-half 2004 debt reduction of $175 million to
$200 million is feasible if FST completes its the announced $100
million of asset sales. Thus, if FST generated full 2004
PD reserve replacement, year-end 2004 Debt/PD BOE could be
in the $4.50/PD BOE range, depending on beginning
2004 PD reserves.
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