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Rating Action:

Moody's downgrades Forest Oil to B3, negative outlook

Global Credit Research - 05 Mar 2014

Approximately $800 million of rated debt affected

New York, March 05, 2014 -- Moody's Investors Service (Moody's) downgraded Forest Oil Corporation's (Forest) Corporate Family Rating (CFR) to B3 from B2 and its senior unsecured notes rating to Caa1 from B3. Moody's affirmed Forest's SGL-3 Speculative Grade Liquidity Rating. The outlook remains negative.

"Drilling results in Forest's Eagle Ford Shale are short of expectations, which we previously stated could be a catalyst for a downgrade," commented Andrew Brooks, Moody's Vice President. "The reallocation of capital away from the Eagle Ford will result in lower oil production than we had previously anticipated, leading to reduced cash flow and higher leverage. Lower projected EBITDA is expected to pressure the leverage covenant under Forest's secured revolving credit facility, which will require relief from its banks."

Ratings downgraded:

..Corporate Family Rating, downgraded to B3

..Probability of Default Rating, downgraded to B3-PD

..Senior Unsecured Notes Rating, downgraded to Caa1

Ratings affirmed:

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

..Outlook, maintained at negative

LGD revision:

...Senior Unsecured LGD to LGD4 - 67% from LGD4 - 66%

RATINGS RATIONALE

Forest's B3 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 projected increase in oil production through its joint venture in the Eagle Ford Shale will fall short in 2014, resulting in an increased reliance on its gassier and lower margin Ark-La-Tex assets. The company's initial capital budget estimate for 2014 allocates roughly $230 million to the Eagle Ford but as well results disappointed, the company lowered the capital allocation to $100 million, with the balance shifted to Ark-La-Tex. This re-allocation of capital will further delay the company's already protracted attempts to increase higher margin oil production and enhance its EBITDA. Forest anticipates that natural gas will comprise 65% of 2014's production and NGLs another 15%, largely unchanged from prior years.

In an effort to address its over-levered balance sheet, Forest embarked on an asset sale program that generated $1.5 billion in proceeds, reducing total debt by about $1.1 billion since mid-2012. With 2013's sale of its Panhandle assets, which represented about half of the company's hydrocarbon production, the four-year downward trajectory in proved reserves and production accelerated. While debt has been reduced materially, production declines have out-paced debt reduction, prompting relative leverage measures to climb. At December 31, debt of $800 million was over $44,000 per Boe of pro forma average daily production, and debt on proved developed reserves was around $12 per Boe. Moody's does not see improvement in these leverage metrics in 2014.

Forest's SGL-3 Speculative Grade Liquidity Rating reflects our expectation of adequate liquidity through 2014, notwithstanding the likely need for covenant relief, which we assume will be forthcoming from Forest's banks. We expect Forest's capital budget of $290-$310 million to result in a cash flow deficit approximating $150 million in 2014, a portion of which will be funded by $67 million of residual cash proceeds from the Panhandle asset sale. At December 31, Forest had an undrawn $400 million secured borrowing base revolving credit facility, although we assume the borrowing base will likely be reduced in conjunction with bank negotiations over covenant relief. 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. While the company's cash balance should be sufficient to fund Forest's negative free cash flow through mid-year, without covenant relief Forest's ability to access the revolver to cover its liquidity needs during the second half of 2014 would be severely restricted. 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 sufficient to reduce relative debt leverage from elevated levels. If Forest can grow production to above 20,000 Boe per day, restoring growth to its Eagle Ford production while maintaining debt to average daily production around $40,000 per Boe, the outlook could be stabilized.

A downgrade would be likely should Forest fail to negotiate covenant relief on its revolving credit facility. Moody's envisions a failure on this front would result in additional asset sales to fund the projected spending gap, or a significant spending reduction, resulting in further downsizing of the company's operations and higher leverage. A downgrade could also be considered if Forest fails to maintain a ratio of Retained Cash Flow/debt over 10%, if it fails to execute on its development program in the Ark-La-Tex, should it be unable to restore profitable growth from its Eagle Ford holdings or should debt on production deteriorate beyond $50,000 per Boe,

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.

The Caa1 rating on the senior unsecured notes reflects the subordination of the senior unsecured notes to Forest's $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 B3 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 downgrades Forest Oil to B3, negative outlook
No Related Data.
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