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New Forest Oil head promises change Cost discipline, exploration and acquisitions based on cash flow, order of day, Craig Clark tells analysts Kristen Nelson Petroleum News Editor-in-Chief
Cost discipline is the name of the game at Forest Oil, says Craig Clark, named president and chief executive officer of the company July 31.
The company�s costs have been too high, and its stock price �has been flat � not for two years, not five years, for 10 years,� Clark said at a Lehman Brothers analysts� meeting in New York in early September: The company�s �culture has been pretty entrenched in the past � and one thing�s for sure is that we will change.�
The Denver-based company has already reduced costs, with savings of almost $50 million over the last year, and plans continued cost reduction in all areas: operating expense, general and administrative, interest and even drilling costs. �We call it creating a culture of cost discipline,� he said.
The company�s lease operating expenses are down 10 percent below 2002, he said, 24 percent below 2001, and down more than 30 percent from a peak in third quarter 2001.
One target for future cost reduction is general and administrative, especially in the corporate office, where the target is a 5 percent reduction in 2004.
Forest will also be targeting high-cost non-operated properties, Clark said: �Our highest-cost properties in the company, when we rank them, are non-operated properties, and they're going to hear from us.�
Forest also wants to operate properties where it has the greater interest. Clark said properties acquired when Forest merged with Forcenergy in 2000 included some where the company has interests of 55, 70 and 75 percent and does not operate.
�It would be our desire to operate those properties,� he said.
Less dependence on frontier exploration In addition to cost reduction, Forest plans to lower its dependence on frontier exploration, implement acquisitions as an integral part of its investment program and maintain a strong and flexible balance sheet.
�I am not planning to throw away value that's already been created, I just want to eliminate our dependence on one single project and the over allocation of capital and manpower to frontier activity,� Clark said.
Forest needs �to reduce the number of frontier areas through sales, trades or farm-outs,� Clark said, because with 14 million acres worldwide, the company can only focus on so many areas. On the other hand, the 12 million net acres Frontier has internationally �has given us the luxury of not only being there first, but also of taking on partners and leveraging our position,� he said, pointing to the company's receipt of free seismic, cash bonuses up front or carried interest in exploration wells � all based on its exploration acreage position. Forest saved a net cost of $45 million, �while maintaining some upside� and pushing wells forward in its inventory.
You can't drill every prospect, Clark said. That�s what the company wanted to do in the past, but �you don�t always have to drill a well: You can trade it. You can use it for leverage. You can farm it out.�
And, Clark said, Forest needs to work a prospect before selling or trading it: At the Bonus field in Wharton County, Texas, Forest has increased production from 500,000 cubic feet a day to 20 million cubic feet a day: �And we almost sold it.�
�The other mantra,� he said, is using new technology �to explore existing assets and add value� � not just to find unknown accumulations of oil and gas around the world.
Three types of acquisitions planned Forest is looking at three types of acquisitions, Clark said: acquisitions on existing assets, acquisitions on nearby fields and large bid packages.
With acquisitions, he said, the plan is to acquire, get data on the prospect, interpret it, drill and move on to the next project.
And to reduce operating expenses. A recent small Permian basin acquisition of four fields had operating costs of about $7.80 per barrel of oil, he said, compared to Forest's traditional operating costs in the area of $5-$6 a barrel: �We took control, we took over operations immediately after closing, and got right to work bringing down their operating costs,� Clark said.
Alaska, international not profitable Of the five business units � Alaska, Canada, Gulf Coast, Western United States and international � only Alaska and international are not profitable, Clark said. �A few years ago, only offshore generated free cash flow, and now Gulf of Mexico, Gulf Coast onshore, Western and Canada generate more cash than they spend,� he said.
Alaska�s 2003 budget of about $70 million includes about $40 million for development wells. The rest is capital for projects operated by others, primarily Unocal, Forest�s partner in Cook Inlet.
Alaska is just shy of that $70 million in cash flow, Clark said.
�It doesn't have anything to do with the disappointment with Redoubt Shoal,� but is because Alaska is still drilling development wells. Canada has had two years of �free cash flow,� he said. And the international area, because it has no production, is not generating cash flow.
But �whether it's drilling or LOE (lease operating expenses), at Forest Oil we have not credited service costs with the reason our costs have gone up � nor do we expect them to take credit when they go down,� Clark said.
In the area of lease operating expenses, Forest is looking at costs and identifying what the number one cost is on a well or in an area.
�Our number one cost, most people would have guessed, would be labor. We found offshore our number one costs are helicopters and boats � Alaska, it's the same way. In West Texas we thought it was labor and it was chemicals and repairs and maintenance.
�And I asked those guys to carve that out, like a tumor, and beat the heck out of it. At the lowest level of the company. And they've done a good job,� Clark said.
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