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Forest Oil, Schlumberger Shale Deal

Zacks Equity Research

Forest Oil Corporation (FST) signed a definitive deal with Schlumberger Limited (SLB) to develop Forest Oil’s Eagle Ford Shale land in Gonzales County, TX.

The agreement stipulates that for Schlumberger to acquire a 50% stake in Forest Oil's Eagle Ford Shale acreage position, it would have to shell out $90 million drilling carry in the form of future drilling and completion services and related development capital. Following the completion of the phased contribution of the drilling carry, Forest Oil and Schlumberger would participate in future drilling on a 50/50 basis.

Per the agreement, Schlumberger would acquire stake in wells spud on or subsequent to Nov 28, 2012, none of which had been placed on production prior to Apr 1, 2013. However, Forest Oil would retain all its interests in wells and production that have been spud prior to Nov 28, 2012. Forest Oil would be the operator of the drilling program and expects that the drilling carry would be fully realized by the end of 2014.

Denver-based independent oil and gas company, Forest Oil’s efforts to expand its liquid production in order to maximize margin is gaining traction. The company added considerable acreage in the Permian Basin in 2012, giving it access to the potential oil resources in several oil-bearing pay zones, including the Wolfbone and Wolfcamp Shale plays.

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 over the next few years.

However, 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 is not helped by its highly levered balance sheet.

The company nonetheless is intent on divesting its non-core properties to boost financial strength and flexibility. We believe this will eventually allow the company to aggressively pursue growth opportunities in its plays and provide meaningful upside potential for investors.

Forest Oil currently retains a Zacks Rank #3 (Hold), implying that it is expected to perform in-line with the broader U.S. equity market over the next one to three months. However, there are other companies in the energy sector that are expected to significantly outperform the equity markets in the next one to three months. These include Zacks Rank #1 (Strong Buy) stocks like Range Resources Corporation (RRC) and Stone Energy Corporation (SGY).


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