MOODY'S CONFIRMS FOREST OIL'S Ba2 SR. IMPLIED & B1 SR. SUB RATINGS; ASSIGNS Ba3 TO NEW SR. UNSECURED NOTES
Approximately $1.1 Billion of Debt Securities & Bank Facilities Affected.
New York, June 22, 2001 -- Moody's Investors Service assigned a Ba3 rating to Forest Oil Corporation's
(FST) offering of $200 million of 8% seven year senior unsecured
notes. Moody's also confirmed FST's Ba2 senior implied rating,
Ba1 senior secured bank revolver rating, and B1 senior subordinated
ratings on FST's $100 million of 10.5% notes due
2006 and Canadian Forest Oil's (CFOIL) $200 million of 8.75%
notes due 2007. FST guarantees CFOIL debt but CFOIL does not guarantee
FST debt. Note proceeds will initially repay secured bank debt,
with that amount subsequently re-borrowed to fund a call of,
first, the CFOIL senior subordinated notes and, second,
a call of the parent's senior subordinated notes. The rating outlook
The Ba1 bank debt is one notch above the Ba2 senior implied rating due
to ample coverage by 80% of FST's consolidated reserve value.
The Ba3 senior unsecured note rating is one notch below the senior implied
rating due to: (1) the notes' effective subordination to a large
potential overhang of secured debt due to note covenants allowing secured
debt the greater of $600 million or $150 million plus 25%
of consolidated net tangible assets, (2) a view that the secured
debt carve-out's scale is needed for front-end development
costs of long-lead time projects and for acquisitions, (3)
reduced junior capital under the notes after retiring subordinated debt
with secured bank debt; and (4) the lack of a guarantee from increasingly
FST's March 2001 rating upgrade reflected its Forcenergy acquisition and
credit accretion. At a reasonable cost, Force increased FST's
capacity to support the risk and large front-end capital outlays
of multiple long-lead time U.S. and foreign exploration
and development projects. While Force increased FST's reliance
on the Gulf of Mexico (GOM), it intensified FST's GOM holdings,
diversified GOM reserve replacement risk, and permitted cost synergies.
The merger added the Cook Inlet Alaska holdings, with the Redoubt
Shoal exploration play recently delivering a second successful exploration
well. FST now operates four core regions and holds a large development,
recompletion, workover, and exploration prospect inventory
across the risk spectrum in a wide range of basins, geologic complexity,
and basin maturity.
FST's ratings potential benefits from the active role played by the Anschutz
Corporation (31% of FST common) which supports aggressive growth
with sound funding. Moody's also observes a material strengthening
of FST's board of directors. FST appears to be mounting a serious
operational and funding effort to eventually reach investment grade.
Regarding debt structure, the new notes are FST's first move to
evolve the structure to senior unsecured status.
Nevertheless, at a time when FST is long on opportunity in the
form of long-lead time, higher risk, cash absorbing
exploration plays offshore South Africa, in Northern Canada,
and in the Cook Inlet, the senior implied rating remains restrained
by: the reliance of 68% of FST's cash flows and over 56%
of production on very short-lived GOM reserves with associated
higher reinvestment risk and high spending needs to replace GOM reserves;
a high concentration of GOM cash flow in few well-bores; significant
leverage on proven developed (PD) reserves and significant debt plus full
development and abandonment capex on total reserves ($5/boe);
and a fairly short reserve life on total PD reserves. Also,
FST's reserve volumes were calculated at unusually high up-cycle
natural gas and high oil prices.
Other limiting factors in the near-term include rising reserve
replacement costs and a view that moderating prices and FST's spending
needs may preempt further 2001debt reduction, causing debt to rise
above 3/31/01 levels. Moody's expects 6/30/01 debt to be materially
above 3/31/00 levels. Moody's believes EBITDA during the last nine
months of the year will be in the range of $350 million to $400
million. Capex for 2001 is budgeted for $470 million ($113
million spent in 1Q01), a high 52% of capex is devoted to
exploration activity that will not augment 2001 production, and
2001 interest expense may exceed $55 million.
Also, pro-forma for Forcenergy, the organic production
trend has been flat-to-down, partly reflecting the
impact of a fairly short reserve life and allocation of high proportions
of annual capex to long lead time exploration activity.
Nevertheless, year 2000 and 2001 placed FST in its strongest position
yet, and FST is far better positioned to take on the higher risks
and funding needs of higher impact exploration activity. Forcenergy
increased FST's scale to 230 mmboe of reserves, intensified its
GOM and added Cook Inlet activity; provided generally greater volume
and prospect diversification, and somewhat reduced leverage on reserves.
FST displays visible 2001 reserve replacement and growth potential,
a promising outlook for key exploration prospects with potential impact
for the 2003 to 2010 period, and credit firming from adequately
productive reinvestment of up-cycle cash flow. Forcenergy
also enhanced funding flexibility due to greater scale, risk diversification,
and liquidity in FST common shares.
FST's main cash flow driver is short-lived GOM production.
Until FST brings a new longer-lived core area to production,
Moody's believes material organic volume growth may be hard to maintain.
FST's high concentration of production at any given time from a hand full
of flush but short-lived GOM wellbores complicates the task of
mounting organic growth while FST also allocates high proportions of capex
to long-lead time exploration projects. This causes production
trends to be prone to events in the GOM and elsewhere.
Thus, FST reported a 6.5% decline in 1Q01 production
from pro-forma 4Q00, a 2% decline from pro-forma
1Q00, and Moody's expects a very modest 2Q01 production gain over
1Q01. Curtailed 1Q01 production due to gas gathering and processing
constraints, steep natural declines on key properties, and
the 2001 capex mix indicate flat-to-modest 2001 volume gains.
Near-term production gain is visible from shallower and deeper
geologic horizons at GOM High Island 116, other shallow and deeper
horizon completions in shallow GOM waters, initial production in
1H01 from the first six Cutpick wells in the complex Alberta Foothills
play, development of the West McArthur River Field in Cook Inlet,
Alaska, and the Mattson discovery in the Ft. Liard area of
the Northwest Territories in Canada. The Lost Ark discovery in
East Breaks 421 in deeper GOM waters (2,700 feet) is another significant
Medium-term, the second Redoubt Shoal well in the Alaska
Cook Inlet oil prospect was successful and FST appears committed to an
initial $150 million to $175 million spending program in
2001-2002 to bring Redoubt to first production later in 4Q02.
Costs include continued drilling, development, and completion
work, including an offshore pipeline to an Alaskan landfall and
artificial lift equipment for completed wellbores. The second well
drilled to a total depth of 15,325 feet and extended the proven
expanse of the reservoir. On third-party engineering,
FST believes it will add about 40mmboe of year-end 2001 reserves
to the current 10mmboe of booked Redoubt reserves. A third exploration
well will drill shortly. Elsewhere, in its growing Canadian
business, FST holds 170,000 net undeveloped acres in Alberta,
Canada and 345,000 net undeveloped acres in frontier areas of the
Pro-forma annualized 4Q00 production and pro-forma 2000
reserves yield a reserve life of 7.4 years on total reserves and
5.4 years on PD reserves. A high 60% of production
is concentrated in GOM reserves with roughly a 3.7 year PD reserve
life and even lower proven developed producing reserve life. This
increases the pressure for sustained drilling success on new flush wellbores
with minimum development delay. FST sustained this profile for
many years, but it reduces the capacity to absorb failures,
delays, shut-ins, and trough cash flow pressures without
affecting production trends.
Assuming oil and gas prices do not fall materially from mid-2001
levels, Moody's expects 2001 EBITDA in the range of $540million
to $590 million, prior to about $22 million of capitalized
G&A. Very high 1Q01 EBITDA of $211 million before capitalized
G&A benefited from peak natural gas prices that since fell sharply.
After capitalized G&A, EBITDA/Interest for 2001 should be in
the range of 9.4x to 10.3x and about 7.5x to 8.5x
in the last nine months of 2001 if prices hold their mid-2001 levels.
Interest coverage by EBITDAX minus three-year average reserve replacement
capex for 2001 of almost $300 would in the range of 4x to 5.2x.
In June 2001, Moody's estimates total debt on PD reserves at a substantial
$3.50/boe, and total debt, plus capex needed
to bring PUD and PDNP reserves to production, plus plugging and
abandonment costs to equate to about $4.95/boe of total
reserves. On the other hand, 12/31/00 debt to total capital
strengthened from 42% on 12/31/00 to 36% on 3/31/01 due
to earnings retention and debt reduction during extraordinarily high natural
gas and oil prices.
At 1Q01 full-cycle costs, FST appears to need about $19/boe
in realized prices to break-even on both interest expense and its
pattern of full reserve finding and development costs. Total 1Q01
full-cycle costs were $18.80/boe, including
$5.49/boe of production costs and severance tax, $1.50/boe
of gross cash G&A, $1.85/boe of cash interest,
and about $10/boe of pro-forma three-year average
all-sources reserve replacement costs.
FST's $19 of total unit operating, interest, and RRC
structure is not fully compatible with the Ba2 senior implied ratings
at trough conditions and mid-cycle prices. Still,
though FST faces rising 2001 sector cost pressures, part of the
high RRC derives from pursuing inherently high cost but high margin GOM
production, part from heavy front-end exploration and development
spending on strategic prospects, and part from FST and Force reserve
revisions at 1998 trough prices. Moody's expects improvement in
FST's high RRC's, though this will need to surmount high 2001 and
probably 2002 drilling, vessel, and oilfield services costs.
Forest Oil Corporation is headquartered in Denver, Colorado.
Robert N. McCreary
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: (212) 553-0376
SUBSCRIBERS: (212) 553-1653
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: (212) 553-0376
SUBSCRIBERS: (212) 553-1653