OilVoice - Forest Oil Announces Record 2008 Year-end Proved Reserves

Forest Oil Announces Record 2008 Year-end Proved Reserves

Wednesday, February 04, 2009

• Estimated proved reserves increased 26% to a record 2,668 Bcfe in 2008
• Reserve replacement ratio in 2008 was 549% from all capital activities with finding, development, and acquisition costs of $2.61 per Mcfe
• Organic reserve replacement ratio in 2008 was a record 281%, with finding and development costs of $2.54 per Mcfe
• Net sales volumes for 2008 are estimated at a record 189.6 Bcfe, an increase of 22% compared to 2007
• Anticipated non-cash ceiling test impairment of approximately $1.5 billion after-tax

Forest Oil Corporation has announced its estimated proved oil and gas reserves and estimated production results for the year ended December 31, 2008. The Company reported the following highlights:

• Record estimated proved reserves of 2,668 Bcfe, replacing 549% of production with finding, development and acquisition costs of $2.61 per Mcfe
• Net sales volumes are estimated to be a record 518 MMcfe/d for the year ended December 31, 2008, an increase of 22% compared to 2007

H. Craig Clark, President and CEO, stated, “Forest’s investment results for 2008 were very solid given the difficult cost environment seen by the industry. For the year, our drilling program added reserves organically at $2.54 per Mcfe, in line with our current three-year average of $2.26. Our acquisition program added reserves at $2.68 per Mcfe and includes all costs related to adding over 150,000 net undeveloped acres primarily in Forest’s core East Texas/N. Louisiana and Panhandle areas. Production grew 22% from total investments and 17% organically during 2008. Reserve replacement from all activities was 549% and a record 281% organically, both excellent, as the amount spent on our exploration and development capital program approximated discretionary cash flow.

Our estimated proved reserves at December 31, 2008 were a record 2,668 Bcfe despite a reduction of 212 Bcfe for revisions, which were predominately price related due to lower year end prices. In summary, we believe these to be excellent investment results. The resulting reserve base, our large undeveloped land position, and low cost structure provide us with a very solid foundation in our core areas with many investment options moving forward.”

ESTIMATED PROVED RESERVES, PRODUCTION, AND CAPITAL EXPENDITURES

Forest reported year end estimated proved reserves of approximately 2,668 Bcfe, up 26% compared to 2,119 Bcfe at December 31, 2007. Estimated proved reserves, which are 63% proved developed (consistent with Forest’s proved developed percentage pro forma for the Cordillera transaction in the third quarter of 2008), consist of approximately 75% natural gas. The pre-tax present value of estimated proved reserves at year end, based on constant prices and costs at year end and discounted at 10%, totaled approximately $4.0 billion, compared to $6.0 billion at December 31, 2007. The valuation was based on year end NYMEX prices for natural gas of $5.71 per MMbtu and oil of $44.60 per barrel, compared to NYMEX prices for natural gas of $6.80 per MMbtu and oil of $95.98 per barrel at December 31, 2007. Forest’s estimated proved reserves were audited by DeGolyer and MacNaughton, an independent third party engineering firm.

As a result of the significant decline in the NYMEX spot price in 2008, Forest anticipates it will record a non-cash ceiling test impairment of approximately $1.5 billion after-tax for the three months and year ended December 31, 2008. The majority of this impairment was due to liquids realizations decreasing approximately 60% in the fourth quarter of 2008. Forest has a portion of its expected 2009 and 2010 production hedged. The value of these derivative instruments was not included in the ceiling test calculation as the Company does not utilize cash flow hedge accounting for its derivative contracts.

The following table reflects the 2008 activity related to Forest’s estimated proved reserve amounts, and includes calculations of finding and development costs and reserve replacement ratios utilizing estimated net sales volumes and estimated capital expenditure amounts.

Estimated Proved Reserves (Bcfe)
December 31, 2007: 2,119

Purchases of properties: 511
Discoveries and extensions: 533
Reserve additions: 1,044

Estimated net sales volumes: (190)
Sales of properties: (93)
Revisions: (212)
Reserve subtractions: (495)

December 31, 2008: 2,668

- 2008 All-sources reserve replacement ratio excluding revisions: 549%
- 2008 All-sources finding, development and acquisition costs excluding revisions (per Mcfe) $2.61
- 2008 Organic reserve replacement ratio excluding revisions: 281%
- 2008 Organic finding and development costs excluding revisions (per Mcfe): $2.54
- 2008 Reserve: production ratio (years): 14.0

CAPITAL ACTIVITIES

For the year ended December 31, 2008, Forest estimated that the Company invested $1.36 billion in exploration and development activities and $1.37 billion in acquisitions. Other costs included as capital expenditures were an estimated $15.0 million associated with asset retirement obligations and an estimated $27.7 million of capitalized interest and equity compensation.

CAPITAL EXPENDITURE

For the year ended December 31, 2009, Forest intends to invest between $500 million and $600 million on exploration and development activities, which the Company expects to be funded through internally generated discretionary cash flow in 2009. Forest will concentrate its drilling activities in its core areas with a focus in 2009 on its East Texas/North Louisiana corridor, including Haynesville/Bossier drilling, and Buffalo Wallow areas and will have limited spending throughout its other productive regions.

H. Craig Clark, President and CEO, further stated, “Our capital plan for 2009 reflects our desire to stay within anticipated cash flow, while our planned well count reflects a significant increase in capital employed in horizontal drilling. Over 33% of our capital is planned to be spent on drilling horizontal wells. Further, in 2009, we will rely almost exclusively on our Lantern rig fleet to drill our vertical and horizontal wells. In the fourth quarter of 2008, we employed as many as 43 third party rigs on our operated projects. We expect this number, which is now eight, to go to one in 2009 as Forest does not have long-term rig contracts. Our current operated rig count, including Lantern rigs, is 15.

Our capital plan is designed to deliver approximately the same net sales volumes and estimated proved reserves in 2009 as in 2008 and will keep our attractive land base intact while focusing on capital efficiency and reducing drilling costs.

It is critical for us to take all possible steps to protect our asset base in this difficult time to allow our shareholders to benefit from our large inventory of projects when more reasonable project economics and capital markets return. We believe the reduction in 2009 activity by us and the industry will ultimately help reduce service costs significantly. Our 2009 plan does not anticipate significant cost reductions at this time.”

Oil and Gas Net Sales Volumes
Forest expects total net sales volumes of 185 to 195 Bcfe in 2009. This sales volume estimate considers the negative impact of increased Alberta royalty rates as of January 1, 2009. The effect of the increased rates is to reduce reported net sales volume estimates by 3 Bcfe in 2009. Net sales volumes are expected to be comprised of approximately 75% natural gas and 25% liquids (15% crude and condensate and 10% natural gas liquids).