Forest scoops up Texas property for $230M

Interests acquired in northern Texas Buffalo Wallow field make it company's largest field in terms of value and reserves

Ray Tyson

Petroleum News Houston Correspondent

Once again, Denver-based Forest Oil has jumped into the acquisition market with the $230 million purchase of an undisclosed private company and its interest in the prolific Buffalo Wallow field in northern Texas, bringing Forest’s acquisition total to more than $1 billion since the company reorganized in 2003.

Buffalo Wallow, with estimated proved reserves of 120 billion cubic feet of gas equivalent, would become Forest’s largest field in terms of value and reserves, the company said in a March 1 conference call with industry analysts. The deal is expected to close around March 31.

Forest also unveiled an aggressive development plan at Buffalo Wallow designed to push current daily production of 25 million to 30 million cubic feet of gas equivalent up to 40 million to 45 million cubic feet by year-end 2006. About 71 percent of the acquired reserves are natural gas.

David Keyte, Forest’s chief financial officer, said the pending acquisition fits perfectly with the company’s revised and more conservative business model, which he said focuses on Forest’s ability to generate free cash flow and maintain stable production.

“It’s a simple business model and so far it’s working,” Keyte said, noting that last year Forest generated more than $300 million in free cash, which it used to buy assets that provided the company with “reasonable production growth” and additional drilling inventory.

“In our last teleconference call we were asked what we would do with the free cash flow we were expected to generate in 2005,” he added. “The acquisition we announced (Feb. 28) answers that question, at least in part.”

Craig Clark, Forest’s chief executive officer, said that Forest closely followed its business model “while not sacrificing our acquisition criteria. In fact, we brought this acquisition over conservative as we have done in the past.”

Investment breaks down to $1.92 per mcf

“It is a high-quality field which gives us a significant multi-year, multi-rig development drilling program,” he said.

Forest said it plans to drill 60 wells in 2005 and 110 wells in 2006, targeting the Granite Wash, Atoka and Morrow formations. For 2005 alone, the company said it plans to spend about $60 million on Buffalo Wallow.

Clark noted that the Granite Wash play in the area has gone from relative inactivity in 2000 of around 50 wells per year up to about 200 wells per year currently on the Texas side of the Texas-Oklahoma border.

“We will become a major operator in the play,” he said, adding that the company expects to employ six drilling rigs once the deal is completed. He said a typical Granite Wash well in the area is about 12,000 feet deep and takes about three weeks to drill.

The property encompasses approximately 33,300 gross acres located primarily in Hemphill and Wheeler counties, the company said. Forest additionally said it has identified 40 proved undeveloped and 330 probable and possible drilling locations.

As of March 28, Forest estimated its debt at $740 million, down about $60 million from year-end 2004 levels. However, company debt would climb to about 39 percent of capital following the transaction, “but we’ll remain within our 30 to 40 percent range,” Keyte said.

“Our challenge here will be to continue to beat down costs, which I think we’ve shown we can do in the last couple of years,” he added. Forest also announced plans to dispose of about $50 million in non-core assets during 2005.