Forest Oil projects up to 15% production increase

$424 million in 2003 property acquisitions expected to boost independent’s output to 440-470 million cubic feet a day of gas equivalent

Ray Tyson

Petroleum News Houston Correspondent

Forest Oil expects to increase oil and gas production 8 to 15 percent in 2004 versus 2003, but warned in a March 16 conference call that this year’s first-quarter output will be at or below the previous quarter due to “excessive” platform downtime in the Gulf of Mexico.

Still, riding high on property acquisitions made last year, the Denver-based independent said it’s looking for average daily production this year of 440 to 470 million cubic feet of gas equivalent, based on the timing of three new fields in the Gulf expected to come on-line in 2004.

Following a tough year in which Forest took a huge write down on proved reserves at its ill-performing Redoubt Shoal oil field in Alaska’s Cook Inlet, “I am certainly ready to play offense and attack our newest acquisitions and projects inventory,” said Craig Clark, Forest’s chief executive officer.

Forest shelled out a record $424 million in property acquisitions during 2003, an effort that helped boost fourth-quarter production 10 percent from the prior quarter and 15 percent for the same period a year earlier. For full-year 2003, production rose about 4 percent compared to 2002.

Redoubt produces fourth quarter loss

Forest attributed its 2003 fourth-quarter loss to an increased depletion rate at Redoubt Shoal amounting to an after tax $16.9 million, an after tax $10.5 million impairment on the value of international exploration assets, and $7.7 million related to discontinued operations based on the company’s decision to sell its Canadian marketing subsidiary to Cinergy Canada.

At the offshore Redoubt Shoal field, the company said it drilled the RU No. 7 horizontal well to a depth of 15,950 feet using water-based mud on the lower portion of the well. The RU No. 1 well has been restored to production and the RU No. 7 is currently being completed, Forest said.

“We will remain active in the acquisition market,” Dave Keyte, Forest’s chief financial officer, said, adding that Forest’s goal in 2004 is to generate $200 million in excess cash through operations and the sale of minor properties.

“This will give us an equity component for strategic opportunities,” he added. “However, for any significant acquisition, we’ll attempt to access capital markets and protect our balance sheet.”

Borrowing base decreased

Of the $728.7 million spent by Forest in 2003, 58 percent or $424.2 million went to acquisitions and 28 percent or $200.2 million to development. Only 14 percent of the budget or $104.3 million was spent on exploration, reflecting Forest’s move away from risky frontier drilling. Forest said it expects to spend $375 million to $440 million on capital projects in 2004, which does not include any acquisitions the company likely would make during the year.

“This is about the pace we will have in 2004, with heavier work concentration on areas where we have acquisitions,” Clark said. “Our 2004 program will be very disciplined” and partly focused on further reducing costs.

Forest added reserves of 380 billion cubic feet of gas equivalent in 2003, largely through acquisitions on the Gulf Coast and in the Permian Basin, and replaced 260 percent of its production. “Unfortunately, it did not totally offset the downward revisions for disappointments in 2003,” Clark said.

Production also will be stymied in the 2004 first quarter, the company said, because of platform downtime resulting from drilling activity and water encroachment in the Gulf’s High Island block 116 field in January, Forest said.

“We will again be challenged in 2004 with rising service costs ... so we have to change the way we drill in some areas,” Clark said.