Forest Oil to Divest Arkoma Basin Natural Gas Properties
Denver-based independent oil and gas company, Forest Oil Corporation (FST) announced that it has entered into a definitive agreement to sell its natural gas properties located in the Arkoma Basin for after-tax cash proceeds of approximately $185 million. The transaction is expected to close on or before Dec 15, 2014, with an economic effective date of Oct 1, 2014.
The properties produced natural gas of approximately 22 million cubic feet equivalent per day (MMcfe/d) during the third quarter of 2014. The properties had an estimated natural gas proved reserves of 159 Bcfe as of Dec 31, 2013, and generated approximately $23 million of lease-level income during the past 12 months ended Sep 30.
The aforementioned Arkoma Basin transaction is not related to Forest’s pending business combination with Sabine Oil & Gas LLC. Forest also has Sabine’s consent to the sale.
Forest Oil has scheduled the special meeting of shareholders for its proposed merger with Sabine Oil & Gas LLC on Nov 20. Forest shareholders of record as of the close of business on Oct 3, will be entitled to vote at the special meeting. Both Forest and Sabine remain focused on completing the merger by this year end.
According to the agreement, Sabine Investor Holdings, LLC, the owner of Sabine Oil & Gas, will contribute its interests in the latter to Forest Oil. in return for the issuance of common and preferred stock in Forest Oil.
Following the transaction, Sabine Oil & Gas will become a wholly owned subsidiary of Forest Oil. Also, Sabine Investor Entities will hold common and preferred shares representing an aggregate 73.5% interest in Forest Oil and the existing common shareholders of the latter will hold the remaining 26.5% interest in the company.
Further, with the issuance of the preferred stock to Sabine, the latter will have about 80% of the combined voting interest in Forest Oil. The transaction is anticipated to be tax-free for Forest Oil shareholders and Sabine Investor Entities. The headquarters of the combined entity will be in Houston, TX, and will be supervised by Sabine’s current executive management team.
Forest Oil has a growing upstream presence in the emerging basins of Texas, Canada and Mexico. Production growth from the Eagle Ford Shale is a key component of the company’s overall annual upstream growth plans for the next few years.
On the flip side, the company has a highly gas-weighted reserves/production profile and exposure to the inherently cyclical and volatile exploration and production sector. This does not get any help from its highly leveraged balance sheet.
The company nonetheless is intent on divesting its non-core properties to boost financial strength and flexibility. We believe that this will eventually allow Forest Oil to aggressively pursue growth opportunities in its plays and provide a meaningful upside for investors.
At present, Forest Oil carries a Zacks Rank #3 (Hold). Meanwhile, one can look at better-ranked players in the energy sector like Cheniere Energy Partners LP. (CQP), Murphy USA Inc. (MUSA) and Sandridge Mississippian Trust II (SDR). All these stocks sport a Zacks Rank #1 (Strong Buy).
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