MOODY'S DOWNGRADES TO Ba3 FOREST OIL'S SR. IMPLIED RATING, SECURED BANK FACILITY TO Ba2, CONFIRMS Ba3 SR. UNSECURED NOTES; NEGATIVE RATING OUTLOOK
Approximately US$1.175 Billion of Debt Securities and Bank Facilities Affected.
New York, June 02, 2004 -- Moody's downgraded Forest Oil's (FST) senior implied rating to Ba3
from Ba2 but confirmed the Ba3 senior unsecured note ratings, ending
a downgrade review begun January 27, 2004. The rating outlook
is negative, principally pending targeted debt reduction and improved
reserve replacement costs by year-end 2004.
The downgrade reflects escalated leverage on reserves after: FST's
negative revision of 30% of its reserves; after the pending
Wiser Oil acquisition (Caa1 senior implied rating); and FST's
need to reduce very high reserve replacement costs. On the positive
side, Moody's expects both FST's and Wiser's production
to grow from first quarter 2004 levels and be delivered into very strong
prices. Wiser's ratings are under review for upgrade to reflect
its pending acquisition by FST.
Removal of the rating notch between the notes and senior implied rating
reflects expected substantially reduced secured debt by year-end
2004. This would sharply reduce the notes' effective subordination
to secured debt. To avoid re-notching the notes, FST
needs to: (1) cut secured debt to less than $100 million
to $150 million by year-end from cash flow and $100
million in pending asset sales, and (2) thereafter adequately internally
fund capital spending and adequately equity fund acquisitions.
After the 36% equity-funded $330 million Wiser Oil
acquisition, we expect FST's bank borrowing base to be $480
million of which roughly $305 million would be drawn (pro-forma
June 30, 2004), potentially reducing to $100 million
to $125 million by year-end from free cash flow and full
asset sale proceeds.
The rating outlook is negative, pending delivery of: $175
million to $200 million of post-acquisition debt reduction
this year; 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 important since
reported reserves are almost 10% higher than third party engineering
estimates. The ratings will be reviewed for sequential quarter
production and cost trends, acquisitions and funding, and
share buyback activity.
This ends Moody's downgrade review, begun upon FST's
larger than expected 78.8 mmboe negative reserve revision,
its far lower than expected level of 2003 drillbit productivity,
and including the pending Wiser acquisition. The negative revisions
resulted in lower than expected year-end 2003 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), to the pro-forma range of $5.30/boe
at June 30, 2004, and to the range of $4.80/boe
by year-end, assuming no asset sales and FST applies all
second-half 2004 cash flow after capital spending to reduce debt.
Wiser's 31.8 mmboe in reserves add measurably to Permian
and Western Canadian Sedimentary Basin holdings FST seeks to intensify.
FST is paying $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 has 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 escalated sharply in fourth quarter 2003 and first quarter 2004,
and 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% and while
production is actually lower than 2000 levels.
Additionally, FST will have 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) Downgrade senior implied rating to Ba3 from Ba2.
ii) Confirm the Ba3 senior unsecured note ratings, affecting 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.
iii) Downgrade to Ba2 from Ba1 FST's $600 million senior
secured revolver ($480 million pro-forma borrowing base).
iv) Confirmed the Ba3 Senior Unsecured Issuer Rating.
Wiser Oil's ratings are under review for upgrade, including
its Caa1 Senior Implied Rating, its Caa3 Senior Subordinated Note
rating, and its Caa2 Senior Unsecured Issuer Rating.
Moody's estimates that 2004 cash flow will be in the $550
million to $590 million range, interest in the $60
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