MOODY'S UPGRADES FOREST OIL'S SR. SUBORDINATED NOTES TO B1 AND SR. SECURED BANK FACILITY TO Ba1
About $900 Million of Debt Securities and Bank Facilities Affected.
New York, March 02, 2001 -- Moody's Investors Service upgraded to B1 from B2 senior subordinated ratings
on Forest Oil's (FST) $100 million of 10.5% notes
due 2006 and subsidiary Canadian Forest Oil's (CFOIL) $200 million
of 8.75% notes due 2007. FST guarantees CFOIL debt;
CFOIL does not guarantee FST debt. Moody's upgraded FST's $600
million senior secured bank revolver maturing 2005 to Ba1 from Ba2,
senior implied rating to Ba2 from Ba3, and senior unsecured issuer
rating to Ba3 from B1. The bank borrowing base is $500 million;
borrowings currently are below the $334 million drawn at year-end.
The upgrade triggers removal of bank borrowing base control. The
banks remain secured by 80% of reserve values; coupled with
the subordinated debt cushion, this warrants notching the revolver
above the senior implied rating. Outlook: stable.
The upgrades reflect FST's increased scale to 230 mmboe of reserves,
production and prospect diversification, and somewhat reduced leverage
on reserves after the Forcenergy (Force) acquisition; reasonably
visible 2001 reserve replacement; promising outlook for key exploration
prospects with potentially important impact in the late 2002 to 2008 period;
and credit accretion from sufficiently productive reinvestment of flush
up-cycle 2000 and 2001 cash flow. The merger enhanced funding
efficiency due to greater scale and risk diversification and liquidity
in FST common shares. Force declared bankruptcy in March 1999,
emerging in February 2000 after converting $390 million of $700
million in debt to equity. FST continues to report an intention
to further reduce debt levels in 2001.
After a series of acquisitions, FST expanded its developed reserve
base across four core regions and inventory of development, recompletion,
workover, and low and high risk exploration prospects across a wide
range of basins, geologic complexity, and basin maturity.
If successful, one lower risk and two higher risk long lead-time
exploration plays could materially add to the productive base.
So far, the ratings also benefit from the active business development
and strategy roles played by Anschutz Corporation (32.8%
of FST common shares). Mr. Anschutz supports aggressive
growth backed by sound funding. FST also displays an attractive
crude oil and natural gas weighting.
Still, the upgrades are prospective to further performance improvement,
including: generating convincing internal production momentum;
stronger cash-on-cash returns over the price cycle,
in particular by reducing unit reserve replacement costs (RRC); reducing
exposure to short-lived concentrations as new areas grow in relation
to total production; and continuing to reduce debt leverage on proven
developed (PD) reserves. "Old" FST's production stabilized at 3.3mmboe
to 3.4mmboe in 4Q99 through 3Q00, after falling from a peak
4.15/mmboe in 4Q1998. Force boosted production by 75%,
but pro-forma production was flat in 3Q00 and 4Q00 and 1Q01 may
again be flat. Curtailed production due to natural gas gathering
and processing constraints, steep production declines on key property
concentrations, and the 2001 capex mix indicate flat-to-modest
production growth for 2001.
With 60% of FST's production coming from very short-lived
reserves, Moody's recognizes the credit implications of: a
fairly aggressive business plan overall; front-end funding
needs and long lead times to first production for FST's Redoubt Shoal,
South African, and Canadian Northwest Territories prospects should
they be declared commercial, plus other frontier activity in seven
other countries. Also, FST's reserve volumes were calculated
at extraordinarily high sector natural gas and high oil prices.
Added to rising drilling and services costs, it is highly likely
2001 reserves will be calculated at materially lower prices and pressure
FST's challenge in mounting sustained internal production growth partly
reflects the relative scarcity of longer-lived high impact prospects
in North America and underscores the reinvestment risk faced by exploration
and production firms focused on the continent's heavily drilled basins.
FST seeks to eventually mitigate this exposure with its international
and Canadian frontier exploration efforts.
Though FST faces reasonable odds that at least one of its major exploration
plays will be successful, and the property portfolio contains considerable
promise, the asset mix remains a restraining factor for the new
ratings. This reflects (1) the modest scale and short reserve life
of the PD reserve foundation, (2) high RRC's, and (3) the
resulting high cash consumption pace and drilling, development,
and inherent delay risk inherent to replacing core production decline
and funding near-term production growth while simultaneously funding
strategic but high risk long-term projects. Near-term,
if full Redoubt Shoal development proceeds during 2001 and 2001,
development capex needs would rise materially above announced levels.
FST is amply exposed to the spending, drillbit, and delay
risks of multiple long-lead time projects.
Force significantly increased FST's reliance on short-lived Gulf
of Mexico (GOM) production but, within the GOM, Force diversified
"old" FST's high concentration of GOM production in a handful of short-lived
properties and intensified the GOM position overall. FST has a
valuable portfolio of GOM leases, production platforms and gathering/processing
infrastructure and 40 years of geologic and operating experience in the
offshore and onshore GOM. "New FST" has a larger prospect inventory
across its GOM, Gulf Coast, Rocky Mountain, Alaskan,
Canadian, and South African properties. FST's GOM holdings
expose it to sustained reserve replacement potential across shallow and
deep horizons from existing infrastructure. In its growing Canadian
business, FST holds 170,000 net undeveloped acres in Alberta,
Canada and 345,000 net undeveloped acres in the Northwest Territories.
Across the low-to-high-risk spectrum, FST's
prospect inventory is broadly diversified. Near-term production
is visible from its GOM High Island 116 Number 4 well that commenced production
in January, several other shallow GOM completions, initial
production in 1H01 from its first six Cutpick wells in the complex Alberta
Foothills play, development of the West McArthur River Field in
Cook Inlet, Alaska, and its Fort Liard area properties in
the southern Northwest Territories in Canada. The Fort Liard deep
gas prospect, if declared commercial, is a candidate for first
production in late 2001 or early 2002. The Lost Ark discovery in
deeper GOM waters was a promising discovery this year. Medium-term,
the first Redoubt Shoal well in the Alaska Cook Inlet oil prospect was
deemed successful, but full commerciality and development depends
on results from three remaining exploration wells. If successful,
FST believes first Redoubt oil could flow by late 2002.
Longer term, if commercial development proceeds, FST hopes
offshore South Africa is a candidate for 2004 or 2005 production.
FST also believes its large acreage position in Canada's highly prospective
Mackenzie River Delta area position it well for exploration and development
if Arctic gas commerciality is justified and take-away pipeline
capacity is built. FST was also successful in three exploration
wells indicating large recoverable natural gas reserves in the Ibhubezi
Field offshore South Africa. Commerciality will depend on continued
successful delineation drilling and, importantly, development
of an onshore natural gas market sizable enough to justify large outlays
for offshore production and processing infrastructure and transmission
pipeline to the coastline.
Pro-forma annualized 4Q00 production and pro-forma 2000
reserves yield a reserve life of 7.6 years on total reserves and
5.5 years on PD reserves. A high 60% of production
is concentrated in GOM reserves having roughly a 3.7 year PD reserve
life and lower PDP life and an even higher proportion of cash flow is
generated by GOM reserves. 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.
Pro-forma EBITDA, after deducting $21.8 million
of 2000 capitalized G&A, was about $427 million and about
$136 million after about $5.5 million capitalized
G&A in 4Q00. Results benefit from peak prices. After
capitalized G&A, pro-forma EBITDA/Interest was 6.8x
for 2000 and about 7.5x for 4Q00, each benefiting from the
price up-cycle. But, in spite of peak prices,
EBITDAX minus average reserve replacement capex covered interest just
under 2x for 2000 and just over 3x in 4Q00. At 4Q00 full-cycle
costs, FST appears to need somewhat over $19/boe in realized
prices to cover interest and its pattern of reserve maintenance capex.
Total capex for 2001 is currently budgeted for $400 million,
of which about 52% is devoted to exploration activity, and
interest expense may be in the range of $50 million.
Total 12/31/00 debt on PD reserves is a substantial $3.71/boe
and on total reserves is $2.71/boe. Moody's estimates
that total debt plus plugging and abandonment costs plus capex needed
to bring PUD and PDNP reserves to production is in the range of $4.50/boe
of total reserves. On the other hand, 12/31/00 debt to total
capital is a stronger 42%.
Total pro-forma 4Q00 full-cycle costs exceed $19/boe,
including $5.33/boe of production costs and severance taxes,
$1.97/boe of gross cash G&A costs, $2.35/boe
of cash interest expense, and $9/boe of pro-forma
three-year average all-sources RRC's. The three-year
average RRC is over $10/boe blending FST's and Force's separate
results together. In spite of peak annualized 4Q00 oil and gas
prices, annualized 4Q00 unit cash flow after interest covered three-year
average unit reserve replacement costs only 147%. In keeping
with the high margin nature of GOM production, GOM RRC's in the
range of $8/boe could be supportive of the rating. RRC's
in other basins inherently need to be substantially lower.
FST's current $19+ total unit operating, interest,
and RRC structure is not fully compatible with the Ba2 senior implied
ratings at trough conditions and is marginal at mid-cycle prices.
Still, though FST's RRC's face added 2001 sector cost pressures,
much 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. Force carried
front-end costs for the valuable Redoubt Shoal drilling and production
platform and Redoubt shows promise of contributing booked reserves by
year-end 2001. The new ratings temporarily accommodate the
high RRC's as long as funding from cash flow and/or an equity offering
is sufficient to fund resulting higher reserve replacement and growth
capex in order to avoid rising leverage.
The $600 million revolver consists of a US$500 million facility
for the parent and a US$100 million-equivalent facility
for Canadian Forest Oil (CFOIL). Borrowings are capped by the revolver
amount and will no longer be capped by a borrowing base. CFOIL
bank debt is secured by CFOIL reserves and parent bank debt is secured
by parent reserves. CFOIL and parent reserves cross-collateralize
each facility and the parent provides a senior guarantee on CFOIL bank
debt and senior subordinated guarantee of the notes. The FST notes
are structurally subordinated to debt on CFOIL assets.
Forest Oil is headquartered in Denver, Colorado.
Robert N. McCreary
Senior Vice President
Moody's Investors Service
JOURNALISTS: (212) 553-0376
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V.P. - Senior Credit Officer
Moody's Investors Service
JOURNALISTS: (212) 553-0376
SUBSCRIBERS: (212) 553-1653