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August 20, 2012 5:47 pm

Forest Oil said to turn away suitors

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This article is provided to FT.com readers by dealReporter—a news service focused on providing insightful intelligence on event driven situations to investors. www.dealreporter.com

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Forest Oil (NYSE:FST) has been approached by more than one buyer in recent months, but its board of directors is not inclined to sell the company, three industry bankers told dealReporter. They said the overtures were made to the independent oil and gas producer prior to the firing of CEO H. Craig Clark in June and also since his departure.

The first banker claimed the approaches were serious. Former CEO Clark, the second banker said, was always looking at a “very material premium”. “His idea of valuation has been ahead of others and people couldn’t go there,” he added.

A spokesperson for the Denver, Colorado-based company did not return calls for comment.

Shares jumped 7.8% on Friday afternoon after dealReporter said the company had been approached by suitors.

Over the past year, Forest Oil’s share price has been hammered by the steep decline in natural gas prices in addition to slow development of its liquids portfolio and levered balance sheet. Forest has missed earnings estimates for the last three quarters.

The first banker, a shareholder and an industry analyst said the board wants to continue to run the show, find a new CEO and fix operational issues.

But the three bankers and a fourth banker noted the stock has shed a lot of value and is trading at historic lows at around USD 7 to USD 8 a share. If a suitors offered the company a large premium, Forest’s board would presumably consider selling the company, these bankers said. The first and second bankers said a low double-digit offer will “get the board thinking”.

The first banker said hedge funds are building position in the stock and there is a possibility as they gain strength the board will be put under pressure to explore strategic alternatives, including a sale, in the near term.

Forest investors would prefer the company explore strategic alternatives, a point raised by investors on the company’s recent 2Q earnings call, the shareholder said. He claimed that when Forest was marketing its Eagle Ford shale play for a joint venture partner, a buyer approached the company to buy it in its entirety.

On the conference call, Forest executives said: “The board is always looking at different opportunities for the company to improve its overall position.”

The industry analyst, however, said the Forest’s sale now would not provide investors any upside until its house is in order. He said it will be a take under.

The analyst said Forest has struggled with developing its asset portfolio, with a lot of enthusiasm built around its assets in the mid-Continent area, Granite Wash and shallow oil plays and those assets have not had the growth or scale as other oily shales. Further, its assets in Eagle Ford are in early stages of delineation and the company failed to secure a JV partner. “All this has bled value out of the stock,” he added.

The next few quarters will see a production decline for Forest, but drilling results have been positive in a limited area in Eagle Ford and the company can invest cash in it to grow oil production, the same analyst said.

The industry bankers said buyers are particularly interested in Forest’s Granite Wash and Eagle Ford assets, with little interest in remaining assets. “Anyone looking for entry in Granite Wash or looking to double down there will be interested in Forest’s assets,” the second banker said.

The logical buyers for Forest could include Apache (NYSE:APA), Halcon Resources (NYSE:HK) and private equity firms, industry sources said. One of the bankers, however, said that Apache does not like to pay high valuations and bought another Granite Wash company, Cordillera Energy Partners III LLC for USD 2.85bn.

A Jefferies analyst report said Forest has over USD 750m available under its credit facility, debt/EBITDA is already at 3.9x and covenants are set at 4.5x. Even with anticipated asset sales, Forest has limited ability to spend above cash flows without breaching the 4.5x limit, the report added. The company does not have any near-term debt maturities coming up.

With additional reporting by Hana Askren

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