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Rating Action:

Moody's affirms Forest Oil's B2 rating with negative outlook

Global Credit Research - 23 Jan 2014

Approximately $800 million of rated debt affected

New York, January 23, 2014 -- Moody's Investors Service affirmed Forest Oil Corporation's (Forest) B2 Corporate Family Rating (CFR), its B3 senior unsecured notes rating and its SGL-3Speculative Grade Liquidity Rating. The outlook remains negative.

"The completion of a series of major divestitures has left behind a much smaller E&P company seeking to stabilize its operations, generate higher quality cash flows and ultimately achieve a reduction in debt leverage," commented Andrew Brooks, Moody's Vice President. " The negative outlook remains in place reflecting the execution challenges Forest faces in achieving these objectives following its significant downsizing."

Ratings affirmed:

..Corporate Family Rating, affirmed at B2

..Probability of Default Rating, affirmed at B2-PD

..Senior Unsecured Notes Rating, affirmed at B3

..Speculative Grade Liquidity Rating, affirmed at SGL-3

..Outlook, maintained at negative

LGD revision:

...Senior Unsecured LGD to LGD4 - 66% from LGD4 - 68%

RATINGS RATIONALE

Forest's B2 CFR reflects its diminished scale following the dramatic downsizing it has evidenced through a series of major asset sales, which while generating funds for a substantial reduction in debt, leaves the company much smaller in size and with less flexibility with which to stabilize its operations and restore growth. Forest's pro forma 2013 production reflecting asset sales approximated 18,500 Boe per day, leaving Forest less than half its size of a year ago, and with reduced basin diversity . Despite its smaller asset base, Forest's B2 rating remains aligned with the B2 E&P peer group. Additionally, while size has been reduced, the production profile will evidence a higher liquids content, which should lead to improved margins and cash flow. Operations are now focused on the Eagle Ford Shale, where Forest operates in a joint venture with Schlumberger Production Management (Schlumberger, A1 stable), and to a lesser extent the liquids-rich East Texas Cotton Valley. Successful development of its Eagle Ford acreage is paramount to stabilizing Forest's B2 CFR.

In an effort to address its over-levered balance sheet, Forest embarked an asset sale program which generated $1.5 billion in proceeds, reducing total debt by about $1.1 billion since mid-2012. With 2013's sale of its Texas Panhandle assets, representing about half of the company's hydrocarbon production, the four-year downward trajectory in proved reserves and production accelerated. While debt has been materially reduced, production declines have out-paced debt reduction, prompting relative leverage measures to climb. At September 30, pro forma debt of $800 million was over $43,000 per Boe of average daily production, and we estimate debt on the company's pro forma proved developed reserves was around $11.50 per Boe, both measures weak for its B2 rating.

Forest's SGL-3 Speculative Grade Liquidity rating reflects our expectation of adequate liquidity through 2014. We expect Forest's capital budget of $290-$310 million to result in a cash flow deficit approximating $140 million in 2014, which would likely be funded by residual cash proceeds from the sale of the Panhandle assets, supplemented by borrowings under its secured borrowing base revolving credit. Pro forma at September 30, Forest had $106 million cash and an undrawn $400 million revolver. The revolver includes a leverage covenant limiting debt/EBITDA to 5x through March 2014 before tightening to 4.75x in 2014's second quarter and 4.5x at June 30, potentially restricting access to the facility without an improvement in EBITDA over the first half of 2014. The revolver is secured by a mortgage and security interest in Forest's proved oil and gas properties and related assets; we view Forest's alternate sources of liquidity as weak.

The negative outlook reflects the execution risk related to Forest's ability to grow production and generate improved margins and cash flow as a significantly smaller company sufficient to appreciably reduce relative debt leverage from elevated levels , notwithstanding its focus on growing oil production in the Eagle Ford. If Forest can grow production to above 20,000 Boe per day while maintaining debt to average daily production around $40,000 per Boe, the outlook could be stabilized.

A downgrade could be considered if Forest fails to execute on its development program in the Eagle Ford, should debt on production deteriorate beyond $45,000 per Boe, or should Forest fail to maintain the ratio of RCF/debt to over 20%. Should Forest's leveraged full-cycle ratio (LFCR) fail to approach 1x by mid-2014, a downgrade is also possible.

An upgrade is unlikely over the next year but would be considered if Forest's production grows to 30,000 Boe per day with debt to average daily production approaching $30,000 on a sustainable basis, together with improved Finding and Development costs, leading to a LFCR exceeding 1.5x.

The B3 rating on the senior unsecured notes reflects both the overall probability of default of Forest, to which Moody's assigns a PDR of B2-PD, and a loss given default of LGD4 (66%). Forest's senior unsecured notes are subordinate to its $400 million secured revolving credit facility's priority claim to the company's assets. The size of the claims relative to Forest's outstanding senior unsecured notes results in the notes being rated one notch below the B2 CFR under Moody's Loss Given Default Methodology.

The principal methodology used in this rating was the Global Independent Exploration and Production Industry published in December 2011. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Forest Oil Corporation is an independent exploration and production company headquartered in Denver, Colorado.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Andrew Brooks
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Steven Wood
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's affirms Forest Oil's B2 rating with negative outlook
No Related Data.

 

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