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Rating Action:

Moody's downgrades Forest Oil to B2, negative outlook

Global Credit Research - 30 May 2013

$1.5 billion of rated debt affected

New York, May 30, 2013 -- Moody's Investors Service downgraded Forest Oil Corporation's (Forest) Corporate Family Rating (CFR) to B2 from B1, its Probability of Default Rating (PDR) to B2-PD from B1-PD, and its senior unsecured notes rating to B3 from B2. The speculative grade liquidity rating of SGL-3 was affirmed. The outlook is negative.

"The downgrade and negative outlook reflect continuing weakness in Forest Oil's credit metrics despite its efforts to reduce debt through asset sales," commented Andrew Brooks, Moody's Vice President. "While Forest has achieved a reduction in its level of outstanding debt, the lost production and reserves associated with divested properties has caused relative leverage measures to increase in addition to shrinking the overall size and scope of its E&P operations, tasking a narrower asset base with reducing leverage."

Ratings downgraded:

..Corporate Family Rating, downgraded to B2 from B1

..Probability of Default Rating, downgraded to B2-PD from B1-PD

..Senior Unsecured Notes Rating, downgraded to B3 from B2

RATINGS RATIONALE

Forest's B2 CFR reflects its weak leverage metrics and narrow cash operating margins, notwithstanding the size and scale of its E&P operations, which while much reduced over the past four years, remains large compared to its B2 rated peers. Forest remains exposed to weak natural gas prices as evidenced by the 66% of 2013's first quarter production which was natural gas (another 19% is natural gas liquids -- NGLs, which are enduring their own price weakness). In an effort to address its over-levered balance sheet, Forest has embarked on a program of asset sales, deploying asset sale proceeds into debt reduction. This program has been moderately successful in that debt has been reduced by $460 million since 2012's third quarter. However, while asset sales were initially directed at non-core, non-producing properties, the sale of certain producing properties served to continue Forest's four-year downward trajectory in proved reserves and average daily production, which over that time period have declined 49% and 36%, respectively. Forest's first quarter 2013 production averaged 41 thousand barrels of oil equivalent (Boe) per day. As a result, while debt levels have been reduced, that decline has been exceeded by the production declines, prompting relative leverage measures to climb. At March 31, debt exceeded $41,000 per Boe of first quarter average daily production while we estimate debt on the company's pro forma (South Texas asset sale) year-end 2012 proved developed reserves was around $13 per Boe, both measures weak for its B2 rating.

On a more positive note, on April 12, Forest announced a joint venture with Schlumberger Production Management (Schlumberger, A1 stable) enabling it to accelerate development of 55,000 acres Forest holds in the Eagle Ford Shale (27,500 net acres to Forest). Schlumberger will pay a $90 million drilling carry (no upfront payment) to earn a 50% working interest in this acreage. The drilling carry will help fund Forest's 2013 capital spending program, the acceleration of which is expected to more than double its Eagle Ford production volumes to 6,500 Boe per day in 2014, adding an element of further growth to the compamy's crude oil production from the 15% contribution registered in 2013's first quarter. Forest anticipates increasing oil production from 15% in 2013's first quarter to over 30% by the end of 2014. It is through the repositioning and growth of oil producing assets that Forest plans to address the extent of its relative debt leverage, however, we would not expect meaningful de-leveraging until 2015.

Forest's SGL-3 Speculative Grade Liquidity rating reflects our expectation of adequate liquidity through mid-2014. We expect Forest's capital budget of $355-$375 million to result in a cash flow deficit approximating $100 million in 2013, which would likely be funded by borrowings under its secured borrowing base revolving credit, supplemented by residual proceeds from any further asset sales. At March 31, Forest had $140 million of outstanding borrowings under its $900 million borrowing base, leaving $758 million net availability. However, the revolver includes a leverage covenant limiting debt/EBITDA to 4.5x, and with March 31 compliance at 4.3x, access to the revolver would be restricted to an incremental $75 million. The revolver is secured by a mortgage and security interest in Forest's proved oil and gas properties and related assets. With total debt at December 31 in excess of PV-10, we view Forest's alternate sources of liquidity as weak.

The negative outlook reflects Moody's view that Forest's debt leverage may not appreciably decline from elevated levels, as well as continuing margin pressure as a result of the company's exposure to weak natural gas and NGL prices, notwithstanding its focus on growing its oil production in the Eagle Ford. If Forest generates cash margin improvement through its focus on greater crude oil production or if additional asset sales generate proceeds for debt reduction, 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 its leveraged full cycle fail to approach 1x by mid-2014. An upgrade would be considered if Forest reduced debt to average daily production below $30,000, together with achieving improved cash flow metrics including retained cash flow to debt over 20% and EBITDA/interest exceeding 4x.

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 (68%). Forest's senior unsecured notes are subordinate to it $900 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 rating Forest Oil Corporation was the Global Independent Exploration and Production Industry Methodology 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.

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 downgrades Forest Oil to B2, negative outlook
No Related Data.

 

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