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Forest Oil evolves into ‘new’ company Denver-based independent plans to transfer offshore Gulf operations to deepwater explorer Mariner Energy, focus on onshore By Ray Tyson Petroleum News Contributing Writer
Exploration and production independent Forest Oil, wanting to concentrate more on its North American onshore assets, has agreed to a complex stock deal that essentially would turn management of its Gulf of Mexico oil and gas properties over to a smaller but evidently more capable offshore operator, Mariner Energy.
The pending deal, expected to close late this year, also represents a significant chunk of Forest’s overall reserves and daily production.
The transaction came on the heels of a two-year company restructuring designed to put Denver-based Forest on stronger financial footing through stringent cost controls and vigorous pursuit of its so-called “acquire-and-exploit” property strategy.
Forest’s latest deal also would complete transformation of Forest into a “new” company, one with “improved focus” and “operational clarity,” Forest chief executive Craig Clark said in a Sept. 12 conference call with industry analysts.
“We have now come full circle on our restructuring (and) in two short years,” he added. “I guess you can say … we have completely restructured the old Forest Oil, hence the word ‘new’.”
Clark indicated that Mariner would do a better job managing Forest’s offshore assets, particularly as industry moves into deeper waters of the Gulf. Mariner already works in 6,000 feet of water, and the company is said to be highly experienced among independent producers when it comes to sub-sea technology.
“Going into deepwater is a natural evolution, yet you have to ask yourself the question, ‘are you good enough to do that or should you pair up with a proven deepwater operator?’” Clark said. “We chose to pair up with a company with that background.” Mariner will increase daily production For years an active participant in federal oil and gas lease sales in the Gulf, Mariner is expected to increase its net daily production in the Gulf over the next six months by about 45 percent to about 130 million cubic feet of gas equivalent from several deepwater discoveries, including Pluto and Swordfish.
Under terms of the deal, Forest would contribute all its Gulf operations, both in deepwater and in shallower waters of the continental shelf, to a newly formed Forest subsidiary called “Spinco” and then spin off Spinco to its shareholders. Spinco would then merge with a subsidiary of Mariner, with Forest shareholders keeping all of their Forest shares plus roughly 0.8 shares of Mariner common stock for each Forest share. Spinco also would borrow money from a third party and pay Forest $200 million, which would be used to pay down Forest debt.
“When the smoke clears Forest shareholders will own 100 percent of Forest Oil and just over 58 percent of Mariner Energy,” said Dave Keyte, Forest’s chief financial officer. Mariner will go public Mariner, currently a private company with 350 mostly institution shareholders, has agreed to expand its base to 2,400 shareholders and then apply for a listing on the New York Stock Exchange, “creating better liquidity options for our shareholders and likely expanding our analyst coverage,” Mariner chief executive Scott Josey said.
He added: “Upon conclusion of the merger, our cash flow will be strong, our debt modest and we will emerge as a leading Gulf of Mexico player with over 950,000 net offshore acres under lease.”
Upon closure of the deal, Mariner’s board of directors will consist of its five current directors plus two new directors mutually agreed on by Forest and Mariners. Forest and Mariner management will keep their current positions. The transaction also is expected to be tax free to Forest and its shareholders — said to be a major driver in the deal.
According to information furnished by Forest, the company would transfer to Spinco proved reserves amounting to 24 percent or 344 billion cubic feet of gas equivalent, leaving Forest with 1.1 trillion cubic feet of proved reserves. Additionally, roughly 24 percent or 258 bcfe of proved developed reserves would go to Spinco, leaving Forest with 826 bcfe of reserves in that category. Deepwater discoveries awaiting infrastructure “A significant amount of these proved undeveloped reserves were discoveries in the deepwater awaiting infrastructure development which is largely complete at this time,” Keyte noted.
Forest also would transfer to Spinco daily production amounting to 46 percent or 228 million cubic feet of gas equivalent, leaving the new Forest with just 267 million cubic feet of gas equivalent of daily output.
“What we’re left with in the new Forest is a mid-cap E&P company with a long-lived North American onshore asset base and a large undeveloped acreage position, as much acreage in fact as companies much larger than us,” Clark said.
Forest’s net acreage position worldwide would shrink by roughly 8 percent to 7.675 million acres, leaving the company with 1.2 million acres of onshore and offshore property in Alaska, 930,000 acres in Canada, 260,000 acres in the western United States and 150,000 acres in the U.S. south, including onshore Gulf Coast. The company also has 5 million acres outside North America. Alaska growth from onshore In Alaska, where Forest holds 172 billion cubic feet equivalent of reserves and 41 million cubic feet equivalent of daily production, growth will come primarily from the onshore, Clark said.
“Alaska’s growth will come from our grassroots exploration on our onshore acreage position,” he explained. “Alaska’s near-term growth is much like Canada’s in that it is already drilled awaiting pipeline.”
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