Forest Oil (FST)
Lower TP to $5 and Maintain Underperform. Following the 4Q12 update,
we lower our ‘PD-Plus’ NAV-based target price to $5 (from $6) and maintain
our Underperform rating. FST improved its liquidity with recent asset sales,
but still needs to shore up its balance sheet (net debt-to-capital exceeding
100%) before it can accelerate development of core assets to drive NAV
accretion. Based on new guidance, we revise our 2013/14 EPS estimates
-22%/+12% and we introduce our 2015 EPS estimate of $0.66.
Spent Itself Into a Corner. FST’s stretched balance sheet is forcing its
hand to monetize assets in order to pay down debt ahead of accelerating the
development of core assets. Despite FST’s stated plans to spend near cash
flow and with nothing drawn on its $900MM revolver, we project that FST will
face a ~$130MM funding gap in 2013 (futures strip) and we expect liquidity
to meaningfully shrink at the next borrowing base redetermination, driven by
the ~40% decline in pro forma proved reserves. While FST noted a number
of potential monetizations on the horizon (Permian, Eagle Ford, Texas
Panhandle, Cotton Valley/Haynesville), the initial capital will be directed
towards paying down a portion of its ~$1.5B in outstanding debt.
Oil Growth to Accelerate in 2H13. FST guided to a ~30% yr/yr increase in
pro forma oil production, driven primarily by the Texas Panhandle and the
Eagle Ford. Production is expected to grow in 2H13, as an increase in oil
volumes is anticipated to offset the declines in natural gas. Oil production is
expected to average 7.5MBbl/d vs. 6.7 MBbl/d in 4Q12 (pro forma
divestitures).
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