SM SM Energy Company

Denver-based Forest Oil Corporation’s (FST) second quarter 2011 earnings of 36 cents per share (excluding non-recurring items), came in fairly ahead of the Zacks Consensus Estimate of 31 cents but were below the year-earlier numbers of 42 cents. Despite lower natural gas price realization and net sales volumes, earnings beat our estimate due to higher oil and natural gas liquids prices.

Total revenue in the reported quarter increased 14.4% to $238.1 million and beat the Zacks Consensus Estimate of $234 million.

Operational Performance

Net sales volumes declined 27.8% year over year organically to 334.7 million cubic feet equivalent per day (MMcfe/d) in the reported quarter.

The average equivalent price per Mcf (including the effect of hedging) was $6.20, up from the year-ago realization of $5.67. Average realized natural gas price was $4.72 per Mcf, down 0.4% from the comparable prior-year quarter, while average realized oil price was $93.07 per barrel, up 31.4% from the year-ago quarter. Natural gas liquids (NGLs) were sold at $36.24 per barrel, up 14.4% from second quarter 2010.

During the quarter, production expenses increased 20.4% year over year to $1.30 per Mcfe. Unit general and administrative expenses increased 6.5% year over year to 33 cents per Mcfe. Depreciation and depletion expenses per unit increased 30.3% to $1.72 per Mcfe from $1.32 per Mcfe in the corresponding 2010 quarter.

Financials

At quarter end, Forest had $479.1 million of cash and cash equivalents with $1.87 billion of long-term debt, representing a debt-to-capitalization ratio of 57.7% (down from 57.8% at the end of first quarter 2011).

Guidance
 
Forest expects net sales volume of 335–345 MMcfe/d for the second half of 2011. Net sales volumes would comprise approximately 70% natural gas and 30% liquids.

Management also forecasts expending $350 million to $375 million, mainly for exploration and development activities. As an initiative to enhance oil development efforts, the company has increased Eagle Ford capital allocation by $120 million in the second half of 2011. Forest also plans to begin drilling in the Wolfcamp Shale oil play and has allocated approximately $50 million to drill and complete six wells during the second half of 2011 while full scale development drilling program is expected to begin in 2012. The company will maintain its capital spending level for the year in Granite Wash.

Forest took an important step toward execution of the spin-off of its Canadian assets in the second quarter.

Outlook

We like Forest Oil’s initiatives toward increased liquids production. The company’s focus on cost control and the upside from Eagle Ford, Granite Washand Wolfcamp Shale position it well to weather the weakness in natural gas prices. The company anticipates cash costs to range between $2.64 and $2.88 per Mcfe.

Forest faces tough competition from its peers such as SM Energy Company (SM) and Cabot Oil & Gas Corporation (COG). Consequently, we maintain our long-term Neutral recommendation for the stock. Forest Oil also holds a Zacks #4 Rank (short-term Sell rating).

 
CABOT OIL & GAS (COG): Free Stock Analysis Report
 
FOREST OIL CORP (FST): Free Stock Analysis Report
 
SM ENERGY CO (SM): Free Stock Analysis Report
 
Zacks Investment Research