Forcenergy selling Gulf of Mexico assets to meet credit crunch

Company expects to write down the book value of its Alaska investments

Allen Baker

BNA Contributing Writer

Forcenergy Inc. has made a big splash in Alaska with its aggressive buying spree in Cook Inlet. But it’s also been splashed with a lot of red ink recently, and the company faces a serious credit crunch — complete with a recent downgrade by one of the nation’s big credit rating firms.

Some of its properties outside Alaska are now on the block. Alaska operations aren’t affected so far, company officials say. But Forcenergy stock fell as low as 75 cents a share in January — compared to a 52-week high of $27.75 and a price near $40 a share as recently as October of 1997.

Up for sale now are Forcenergy properties in the Gulf of Mexico.

“We’re looking at an asset sale on a grouping of properties in the Gulf we feel would yield about $75 million,” said Mike McNamara of Forcenergy.

That move came after a $150 million injection of equity capital fell through earlier in January.

Under pressure

In the last week of January, Standard & Poor’s downgraded Forcenergy’s debt, already in junk-bond territory, and Moody’s Investors Service placed the company’s long-term debt ratings on review for downgrade. S&P dropped its rating on Forcenergy corporate debt to triple-C-plus, from single-B-plus. Subordinated debt went to triple-C-minus from single-B-minus.

S&P noted in its downgrade announcement that the sale and partial sale of working interests in 219 Gulf of Mexico blocks — of which Forcenergy holds 100 percent interests in 50 — was a realistic possibility.

But since most interested purchasers also are suffering from depressed prices, S&P notes, bids may be low and scarce. The company has to meet upcoming coupon payments in February and May, S&P says, and although the company has $20 million left in a $320 million revolving credit facility, the banks could refuse to provide that capital under terms of the credit agreement. The $20 million would take care of the February payment — if it’s available, S&P said.

Even so, the respite would be temporary. The credit line has a mandatory reduction back to $300 million on May 1 and a further cut to $275 million on Sept. 1.

Moody’s, the other major credit rating agency, also sees dark clouds on the Forcenergy horizon if oil prices don’t pick up.

But while the company expected to write down the book value of its investment in Alaska, Forcenergy’s Alaska properties “are very high on our priority list,” said Porter, the executive vice president.

Gary E. Carlson, who heads Forcenergy’s Alaska operation, wouldn’t say if Forcenergy would continue its aggressive bidding for leases in Alaska.

Forcenergy already holds leases on 179,113 acres, giving it the number six ranking among oil companies in the state. Alaska production from Cook Inlet and McArthur River fields is in the neighborhood of 8,800 barrels of oil daily. Redoubt Shoals is estimated to hold 30 million barrels or more.

To improve its equity position, Forcenergy had been negotiating with Madison Dearborn Partners Inc. and Oaktree Capital Management L.L.C. on a preferred stock issue. Those firms were planning to buy $42 million in preferred as part of a $150 million capital injection. But in late December, Forcenergy announced late that the investors had informed the company it had not met some of the conditions of the investment, and new terms were being discussed. Then, in late January, the company said it was not longer in talks with Madison Dearborn and Oaktree.

With that deal falling apart, three major brokerages — Goldman Sachs, Lehman Brothers, and Salomon Smith Barney — downgraded Forcenergy stock.