<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from N/A to N/A
Commission File Number 0-4597
FOREST OIL CORPORATION
(Exact name of registrant as specified in its charter)
New York 25-0484900
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1600 Broadway
Suite 2200
Denver, Colorado 80202
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 812-1400
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
--- ---
Number of Shares
Outstanding
Title of Class of Common Stock October 31, 1997
- ------------------------------ ----------------
Common Stock, Par Value $.10 Per Share 36,316,341
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<PAGE>
PART I. FINANCIAL INFORMATION
FOREST OIL CORPORATION
Condensed Consolidated Balance Sheets
(Unaudited)
September 30, December 31,
1997 1996
------------- ------------
(In Thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 24,893 8,626
Accounts receivable 51,558 55,462
Other current assets 4,453 4,996
--------- ---------
Total current assets 80,904 69,084
Net property and equipment, at cost 509,250 458,242
Goodwill and other intangible assets, net 27,688 29,439
Other assets 11,293 6,693
--------- ---------
$ 629,135 563,458
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 623 2,091
Accounts payable 51,602 69,493
Accrued interest 536 4,584
Other current liabilities 1,873 5,565
--------- ---------
Total current liabilities 54,634 81,733
Long-term debt 244,865 168,859
Other liabilities 17,331 19,844
Deferred revenue 7,591
Deferred income taxes 35,731 33,716
Minority interest 13,310 9,272
Shareholders' equity:
Preferred stock - 15,827
Common stock 3,631 3,053
Capital surplus 486,666 438,556
Accumulated deficit (224,636) (214,190)
Foreign currency translation (2,397) (803)
--------- ---------
Total shareholders' equity 263,264 242,443
--------- ---------
$ 629,135 563,458
--------- ---------
--------- ---------
See accompanying notes to condensed consolidated financial statements.
-1-
<PAGE>
FOREST OIL CORPORATION
Condensed Consolidated Statements of Production and Operations
(Unaudited)
<TABLE>
Three Months Ended Nine Months Ended
---------------------------- ----------------------------
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
------------ ------------ ------------- -------------
(In Thousands Except Production and Per Share Amounts)
<S> <C> <C> <C> <C>
PRODUCTION
Natural gas (mmcf) 13,116 11,221 36,149 30,665
-------- ------- -------- --------
-------- ------- -------- --------
Oil, condensate and natural gas
liquids (thousands of barrels) 882 700 2,373 1,933
-------- ------- -------- --------
-------- ------- -------- --------
STATEMENTS OF CONSOLIDATED OPERATIONS
Revenue:
Marketing and processing $ 42,261 52,025 140,470 135,614
Oil and gas sales:
Gas 25,496 19,262 71,196 54,729
Oil, condensate and natural gas liquids 14,220 12,278 41,029 33,333
-------- ------- -------- --------
Total oil and gas sales 39,716 31,540 112,225 88,062
Miscellaneous, net 232 404 1,882 707
-------- ------- -------- --------
Total revenue 82,209 83,969 254,577 224,383
Expenses:
Marketing and processing 40,362 49,950 134,268 129,115
Oil and gas production 8,912 7,368 27,583 23,224
General and administrative 3,901 3,189 12,448 9,526
Interest 5,619 5,822 15,652 18,042
Depreciation and depletion 22,064 16,873 58,820 43,862
Minority interest in earnings (loss) of
subsidiary 48 (57) 209 (228)
-------- ------- -------- --------
Total expenses 80,906 83,145 248,980 223,541
-------- ------- -------- --------
Earnings before income taxes and
extraordinary item 1,303 824 5,597 842
Income tax expense (benefit):
Current 86 (350) 1,359 2,217
Deferred 634 295 2,329 1,033
-------- ------- -------- --------
720 (55) 3,688 3,250
-------- ------- -------- --------
Earnings (loss) before extraordinary item 583 879 1,909 (2,408)
Extraordinary item - loss on extinguishment
of debt (12,359) - (12,359) -
-------- ------- -------- --------
Net earnings (loss) $(11,776) 879 (10,450) (2,408)
-------- ------- -------- --------
-------- ------- -------- --------
Weighted average number of common and
common equivalent shares outstanding 33,970 26,100 32,776 23,698
-------- ------- -------- --------
-------- ------- -------- --------
Earnings (loss) attributable to common stock $(11,776) 340 (10,639) (4,027)
-------- ------- -------- --------
-------- ------- -------- --------
Primary and fully diluted earnings (loss) per
common and common equivalent share:
Earnings (loss) attributable to common
stock before extraordinary item $ .02 .01 .05 (.17)
Extraordinary item - loss on extinguishment
of debt (.37) - (.37) -
-------- ------- -------- --------
Earnings (loss) attributable to common stock $ (.35) .01 (.32) (.17)
-------- ------- -------- --------
-------- ------- -------- --------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-2-
<PAGE>
FOREST OIL CORPORATION
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
Nine Months Ended
-----------------------------
September 30, September 30,
1997 1996
------------- -------------
(In Thousands)
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) before extraordinary item $ 1,909 (2,408)
Adjustments to reconcile net earnings (loss) to
net cash provided by operating activities:
Depreciation and depletion 58,820 43,862
Amortization of deferred debt costs 503 722
Deferred income tax expense 2,329 1,033
Minority interest in earnings (loss) of subsidiary 209 (228)
Other, net 403 3,245
(Increase) decrease in accounts receivable 5,751 (8,395)
Increase in other current assets (1,728) (133)
Increase (decrease) in accounts payable (11,778) 7,876
Decrease in accrued interest and other
current liabilities (13,019) (1,169)
Settlement of volumetric production payment obligation (6,832) -
Amortization of deferred revenue (1,524) (6,568)
--------- --------
Net cash provided by operating activities 35,043 37,837
Cash flows from investing activities:
Acquisition of subsidiaries - (136,191)
Capital expenditures for property and equipment (114,834) (63,673)
Proceeds from sales of assets 7,485 15,072
Decrease (increase) in other assets, net (4,145) 68
--------- --------
Net cash used by investing activities (111,494) (184,724)
Cash flows from financing activities:
Proceeds from bank borrowings 259,084 150,453
Repayments of bank borrowings (217,715) (155,418)
Repayments of production payment obligation (1,991) (2,435)
Repayments of nonrecourse secured loan - (486)
Issuance of 8-3/4 senior subordinated notes, net
of issuance costs 121,854 -
Redemption of 11-1/4% senior subordinated notes (99,195) -
Proceeds from common stock offering, net of
offering costs - 136,591
Proceeds of warrant exercise 30,100 26,187
Proceeds from the exercise of options 2,187 -
Treasury shares sold by subsidiary 2,817 -
Costs of preferred stock conversion (800) -
Payment of preferred stock dividends (540) (539)
Decrease in other liabilities, net (3,414) (3,075)
--------- --------
Net cash provided by financing activities 92,387 151,278
Effect of exchange rate changes on cash 331 (2)
--------- --------
Net increase in cash and cash equivalents 16,267 4,389
Cash and cash equivalents at beginning of period 8,626 3,287
--------- --------
Cash and cash equivalents at end of period $ 24,893 7,676
--------- --------
--------- --------
Cash paid during the period for:
Interest $ 19,022 13,670
Income taxes $ 4,282 2,511
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-3-
<PAGE>
FOREST OIL CORPORATION
Notes to Condensed Consolidated Financial Statements
Nine Months Ended September 30, 1997 and 1996
(Unaudited)
(1) Basis of Presentation
The condensed consolidated financial statements included herein are
unaudited. In the opinion of management, all adjustments, consisting of
normal recurring accruals, have been made which are necessary for a fair
presentation of the financial position of the Company at September 30,
1997 and the results of operations for the three and nine month periods
ended September 30, 1997 and 1996. Quarterly results are not necessarily
indicative of expected annual results because of the impact of
fluctuations in prices received for liquids (oil, condensate and natural
gas liquids) and natural gas and other factors. For a more complete
understanding of the Company's operations and financial position, reference
is made to the consolidated financial statements of the Company, and
related notes thereto, filed with the Company's annual report on Form 10-K
for the year ended December 31, 1996, previously filed with the Securities
and Exchange Commission.
(2) Subsidiaries
On December 20, 1995 the Company purchased a 56% economic (49% voting)
interest in Saxon Petroleum Inc. (Saxon) for approximately $22,000,000.
Saxon is a Canadian exploration and production company with headquarters
in Calgary, Alberta and operations concentrated in western Alberta. In
the transaction, Forest received from Saxon 40,800,000 voting common
shares, 12,300,000 nonvoting common shares which are convertible to voting
common shares at any time, 15,500,000 convertible preferred shares and
warrants to purchase 5,300,000 common shares. In exchange, Forest
transferred to Saxon its preferred shares of Archean Energy Ltd., issued
to Saxon 1,060,000 common shares of Forest and paid Saxon $1,500,000 CDN.
The preferred shares of Archean Energy, Ltd. were recorded at their
historical carrying value of $11,301,000. The Forest common shares issued
to Saxon were recorded at their estimated fair value determined by
reference to the quoted market price of the shares immediately preceding
the announcement of the acquisition. In January 1996, Saxon sold these
shares in a public offering of Forest Common Stock and used the proceeds
to reduce its bank debt.
Since Forest has majority voting control over Saxon as a result of the
voting common shares that it owns and proxies that it holds, it has
accounted for Saxon as a consolidated subsidiary from the date of its
acquisition.
In September 1996, the preferred shares of Archean were redeemed for cash
at their approximate carrying value.
On January 31, 1996 the Company acquired ATCOR Resources Ltd. of Calgary,
Alberta for approximately $136,000,000 including acquisition costs of
approximately $1,000,000. The purchase was funded by the net proceeds of
a Common Stock offering and approximately $8,300,000 drawn under the
Company's bank credit facility. The exploration and production business
of ATCOR was renamed Canadian Forest Oil Ltd. (Canadian Forest).
As part of the Canadian Forest acquisition, Forest also acquired ATCOR's
natural gas marketing business, which was renamed Producers Marketing Ltd.
(ProMark). Goodwill and other intangibles recorded in the acquisition
included approximately $15,000,000 associated with certain natural gas
marketing contracts, which is being amortized over the average life of the
contracts of 12 years and approximately $17,000,000 of goodwill associated
with the gas marketing business acquired which is being amortized over 20
years.
On January 21, 1997 Forest converted its preferred shares of Saxon into
27,192,983 nonvoting common shares. Through September 30, 1997 Forest
acquired 7,557,283 voting common shares and 392,867 nonvoting common
shares of Saxon in exchange for 196,856 common shares of Forest pursuant
to an equity participation agreement. These transactions increased
Forest's economic interest in Saxon to 64%.
-4-
<PAGE>
(2) Subsidiaries (continued)
The board of directors of Saxon has created a special committee of
directors which has engaged a third party to assess the asset base of
Saxon and to determine strategic alternatives to maximize shareholder
value. The Company anticipates that this assessment may result in a
transaction in which Forest would sell its entire interest in Saxon. No
assurance can be given as to whether any such transaction will occur or as
to the terms thereof.
The consolidated balance sheet of Forest includes the accounts of Saxon
and Canadian Forest at December 31, 1996 and September 30, 1997. The
consolidated statements of operations include the results of operations of
Saxon effective January 1, 1996 and the results of operations of Canadian
Forest effective February 1, 1996. The following pro forma consolidated
statement of operations information for the nine months ended September 30,
1996 assumes that the Common Stock offering and the acquisition of Canadian
Forest occurred as of January 1, 1996.
Pro Forma Nine Months
Ended September 30, 1996
------------------------
(In Thousands, Except
Per Share Amounts)
Revenue:
Marketing and processing $148,955
Oil and gas sales 91,772
Miscellaneous, net 707
--------
Total revenue $241,434
--------
--------
Net loss $ (2,026)
--------
--------
Primary and fully diluted loss per common share $ (.15)
--------
--------
Summarized consolidated financial information for Canadian Forest Oil
as of September 30, 1997 and for the nine months ended September 30, 1997
is as follows:
1997
--------------
(In Thousands)
Summarized Consolidated Balance Sheet Information:
ASSETS
Current assets $ 38,174
Net property and equipment 118,982
Goodwill and other intangible assets, net 27,688
Other assets 3,132
--------
$187,976
--------
--------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities $ 22,931
Intercompany payable 70
8-3/4% senior subordinated notes 124,681
Other liabilities 356
Deferred income taxes 37,435
Shareholders' equity 2,503
--------
$187,976
--------
--------
Summarized Consolidated Statements of Operations:
Revenue $169,412
--------
--------
Earnings before income taxes $ 5,792
--------
--------
Net earnings $ 1,791
--------
--------
-5-
<PAGE>
(3) Capital Stock
On January 31, 1996, 13,200,000 shares of Common Stock were sold for
$11.00 per share in a public offering. Of this amount 1,060,000 shares
were sold by Saxon and 12,140,000 shares were sold by Forest. The net
proceeds to Forest and Saxon from the issuance of shares totaled
approximately $136,000,000 after deducting issuance costs and underwriting
fees.
On August 1, 1996 The Anschutz Corporation (Anschutz) exercised its option
to purchase 2,250,000 shares of Forest's Common Stock for $26,200,000 or
approximately $11.64 per share.
On November 5, 1996 the Company exchanged 2,000,000 shares of Common Stock
plus approximately $13,500,000 in cash to extinguish approximately
$43,000,000 of nonrecourse secured debt owed to Joint Energy Development
Investments Limited Partnership (JEDI), a Delaware limited partnership
whose general partner is an affiliate of Enron Corp. (Enron). In
connection with this transaction, Anschutz acquired 1,628,888 shares of
Common Stock by exercising warrants to purchase 388,888 shares of Common
Stock at $10.50 per share and by converting 620,000 shares of Forest's
Second Series Preferred Stock into 1,240,000 shares of Common Stock.
On November 14, 1996 the Company filed a shelf registration with the
Securities and Exchange Commission to issue up to $250,000,000 in one or
more forms of debt or equity securities. Except as otherwise provided in
an applicable prospectus supplement, the net proceeds from the sale of the
securities will be used for the acquisition of oil and gas properties,
capital expenditures, the repayment of subordinated debentures or other
debt, repayments of borrowings under revolving credit agreements, or for
other general corporate purposes.
On February 7, 1997 the Company called for redemption all 2,877,673 shares
of its $.75 Convertible Preferred Stock. This conversion eliminated all
outstanding preferred stock from Forest's capital structure. In response
to its call for redemption, 2,783,945 shares or 96.7% of the shares
outstanding were tendered for conversion into Common Stock on or before
the February 21, 1996 deadline. The remaining 93,728 preferred shares
were redeemed by the Company at the redemption price of $10.06 per share
(at a total cost of $942,904) on February 28, 1997. Lehman Brothers Inc.
purchased 65,616 shares of Common Stock to fund the cash requirement of
the redemption in accordance with the terms of its standby purchase
agreement with Forest. Redemption of the $.75 Convertible Preferred Stock
eliminated approximately $2,200,000 of annual preferred dividend payments.
On August 28, 1997 Anschutz acquired 3,500,000 shares of Common Stock
through the exercise of a warrant for $8.60 per share resulting in cash
proceeds to Forest of $30,100,000. The original exercise price was $10.50
per share. The reduction in the exercise price offered to Anschutz reflects
an approximate 10% present value discount computed to the warrants'
expiration date of July 27, 1999. Proceeds from the exercise were used to
reduce borrowings under the Company's bank credit facilities.
(4) Net Property and Equipment
The components of net property and equipment are as follows:
September 30, December 31,
1997 1996
------------- ------------
(In Thousands)
Oil and gas properties $1,563,808 1,457,212
Buildings, transportation and
other equipment 10,458 10,993
---------- ---------
1,574,266 1,468,205
Less accumulated depreciation,
depletion and valuation allowance 1,065,016 1,009,963
---------- ---------
$ 509,250 458,242
---------- ---------
---------- ---------
-6-
<PAGE>
(5) Goodwill and Other Intangible Assets
Goodwill and other intangible assets recorded in the acquisition of
ProMark consist of the following:
September 30, December 31,
1997 1996
------------- ------------
(In Thousands)
Goodwill $16,601 16,728
Gas marketing contracts 14,482 14,594
------- ------
31,083 31,322
Less accumulated amortization 3,395 1,883
------- ------
$27,688 29,439
------- ------
------- ------
Goodwill is being amortized on a straight line basis over twenty years.
The amount attributed to the value of gas marketing contracts acquired is
being amortized on a straight line basis over the average life of such
contracts of twelve years.
(6) Long-term Debt
The components of long-term debt are as follows:
September 30, December 31,
1997 1996
------------- ------------
(In Thousands)
U.S. Credit Facility $ 78,000 26,400
Canadian Credit Facility - 32,500
Saxon Credit Facility 22,487 -
Production payment obligation 10,605 12,596
8-3/4% Subordinated debentures 124,681 -
11-1/4% Subordinated debentures 9,715 99,421
--------- -------
245,488 170,917
Less current portion 623 2,058
--------- -------
Long-term debt $244,865 168,859
--------- -------
--------- -------
On September 29, 1997, pursuant to a tender offer, $90,233,000 of the
Company's outstanding $100,000,000 aggregate principal amount of 11-1/4%
Senior Subordinated Notes due 2003 was tendered by the holders of the
Notes. The purchase price for each $1,000 principal amount of Notes
validly tendered and accepted was $1,096.96. As a result of the tender
offer in the third quarter of 1997, Forest recorded an extraordinary loss
of approximately $12,359,000 relating to the excess of the tender price
over the carrying amount of the Notes, net of related unamortized debt
issuance costs.
On September 29, 1997 the Company's wholly-owned subsidiary, Canadian
Forest, completed an offering of $125,000,000 of its 8-3/4% Senior
Subordinated Notes due 2007, which were sold at 99.745% and are guaranteed
by the Company on a senior subordinated basis. A portion of the proceeds
was used to fund the tender offer described above, a portion was used to
repay the outstanding balance under the Canadian Credit facility and the
remainder will be used for working capital and to fund capital
expenditures.
(7) Deferred Revenue
From 1991 to 1994, the Company sold volumetric production payments to
Enron to fund capital expenditures and property acquisitions. On June 30,
1997 the Company purchased from Enron the obligation related to its last
remaining volumetric production payment. The purchase price of
approximately $6,832,000 plus expenses was funded by advances under the
Company's bank credit facility. Reserves of approximately 3.5 BCFE, which
were dedicated to repayment of this volumetric production payment, reverted
to the Company's interest.
-7-
<PAGE>
(8) Earnings (Loss) Per Share
Primary earnings (loss) per share is computed by dividing net earnings
(loss) attributable to common stock by the weighted average number of
common shares and common share equivalents outstanding during each period,
excluding treasury shares. Net earnings (loss) attributable to common
stock represents net earnings (loss) less preferred stock dividend
requirements. Common share equivalents include, when applicable, dilutive
stock options and warrants using the treasury stock method.
Fully diluted earnings (loss) per share assumes, in addition to the above,
(i) that convertible preferred stock was converted at the beginning of
each period until its redemption, and (ii) any additional dilutive effect
of stock options and warrants. The assumed exercises and conversions did
not have a material effect or were antidilutive for the three and nine
months ended September 30, 1997 and 1996.
-8-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Company's Consolidated Financial Statements and Notes thereto.
FORWARD-LOOKING STATEMENTS
Certain of the statements set forth in this Form 10-Q, such as the
statements regarding planned capital expenditures and the availability of
capital resources to fund capital expenditures, are forward-looking and are
based upon the Company's current belief as to the outcome and timing of such
future events. There are numerous risks and uncertainties that can affect
the outcome and timing of such events, including many factors which are
beyond the control of the Company. Should one or more of these risks or
uncertainties occur, or should underlying assumptions prove incorrect, the
Company's actual results and plans for 1997 and beyond could differ
materially from those expressed in the forward-looking statements. For a
description of risks affecting the Company's business, see "Item 1 - Business -
Forward-Looking Statements and Risk Factors" in the Company's 1996 Annual
Report on Form 10-K.
RESULTS OF OPERATIONS FOR THE THIRD QUARTER OF 1997
The net loss for the third quarter of 1997 was $11,776,000 or $.35 per
common share compared to net earnings of $879,000 or $.01 per common share in
the third quarter of 1996. The net loss for the 1997 period includes an
extraordinary loss on the extinguishment of debt of $12,359,000, or $.37 per
common share related to the tender offer for the Company's 11-1/4% Senior
Subordinated Notes. Earnings attributable to common stock before
extraordinary item for the third quarter of 1997 were $583,000 or $.02 per
common share compared to $340,000 or $.01 per common share in the third
quarter of 1996. The improved earnings from continuing operations for the
third quarter of 1997 were attributable primarily to increased production and
higher natural gas prices.
The Company's marketing and processing revenue decreased by 19% to
$42,261,000 in the third quarter of 1997 from $52,025,000 in the third
quarter of 1996 and the related marketing and processing expense decreased by
19% to $40,362,000 in the 1997 quarter from $49,950,000 in the previous year.
The gross margin reported for marketing and processing activities decreased
to $1,899,000 in the third quarter of 1997 from $2,075,000 in the third
quarter of 1996, due primarily to a reduction in third party contract
processing volumes.
The Company's oil and gas sales revenue increased by 26% to $39,716,000
in the third quarter of 1997 from $31,540,000 in the third quarter of 1996.
Production volumes for natural gas in the third quarter of 1997 increased 17%
from the comparable 1996 period due primarily to 1997 discoveries in the Gulf
of Mexico being brought onto production. The average sales price received
for natural gas in the third quarter of 1997 increased 13% compared to the
average sales price received in the corresponding 1996 period. Production
volumes for liquids (consisting of oil, condensate and natural gas liquids)
were 26% higher in the third quarter of 1997 than in the third quarter of
1996 due primarily to new production from Gulf of Mexico and Canadian
properties. The average sales price received by the Company for its liquids
production during the third quarter of 1997 decreased 7% compared to the
average sales price received during the comparable 1996 period.
Oil and gas production expense of $8,912,000 in the third quarter of
1997 increased 21% from $7,368,000 in the comparable period of 1996 due
primarily to expenses relating to new production from Gulf of Mexico
properties and temporary transportation expenses associated with the Bigoray
field. On an MCFE basis (MCFE means thousands of cubic feet of natural gas
equivalents, using conversion ratio of one barrel of oil to six MCF of
natural gas), production expense was $.48 per MCFE in the third quarter of
both 1997 and 1996.
-9-
<PAGE>
The following tables set forth production volumes, average sales prices
and production expenses during the periods as follows:
<TABLE>
Three Months Ended September 30, 1997
---------------------------------------------
Gulf Total Total
Coast Western U.S. Canada Company
------- ------- ------ ------ -------
<S> <C> <C> <C> <C> <C>
NATURAL GAS
Total production (MMCF) 8,638 689 9,327 3,789 13,116
Sales price received (per MCF) $ 2.34 2.07 2.32 1.22 1.99
Effects of energy swaps (per MCF) (1) (.09) - (.08) .01 (.05)
------- ----- ----- ----- -----
Average sales price (per MCF) $ 2.25 2.07 2.24 1.23 1.94
LIQUIDS
OIL AND CONDENSATE:
Total production (MBBLS) 298 30 328 383 711
Sales price received (per BBL) $ 18.22 19.03 18.29 21.18 19.85
Effects of energy swaps (per BBL) (1) .13 - .12 .18 .15
------- ----- ----- ----- -----
Average sales price (per BBL) $ 18.35 19.03 18.41 21.36 20.00
NATURAL GAS LIQUIDS:
Total production (MBBLS) 38 3 41 130 171
Average sales price (per BBL) $ 9.24 7.67 9.12 10.35 10.05
Total liquids production (MBBLS) 336 33 369 513 882
Average sales price (per BBL) $ 16.27 17.30 16.37 15.95 16.12
Total production (MMCFE) 10,654 887 11,541 6,867 18,408
Average sales price (per MCFE) $ 2.34 2.25 2.33 1.87 2.16
Operating expense (per MCFE) .40 .98 .44 .55 .48
------- ----- ----- ----- -----
Netback (per MCFE) $ 1.94 1.27 1.89 1.32 1.68
------- ----- ----- ----- -----
------- ----- ----- ----- -----
</TABLE>
(1) Energy swaps were entered into to hedge the price of spot market volumes
against price fluctuations. Hedged natural gas volumes were 4,400 MMCF in
the three months ended September 30, 1997. Hedged oil and condensate
volumes were 236,000 barrels in the three months ended September 30, 1997.
Aggregate net losses under energy swap agreements were $612,000 for the
period.
-10-
<PAGE>
<TABLE>
Three Months Ended September 30, 1996
---------------------------------------------
Gulf Total Total
Coast Western U.S. Canada Company
------- ------- ------ ------ -------
<S> <C> <C> <C> <C> <C>
NATURAL GAS
Total production (MMCF) 6,477 890 7,367 3,854 11,221
Sales price received (per MCF) $ 2.13 1.95 2.11 1.21 1.80
Effects of energy swaps (per MCF) (1) (.10) - (.09) (.07) (.08)
------- ----- ----- ----- ------
Average sales price (per MCF) $ 2.03 1.95 2.02 1.14 1.72
LIQUIDS
OIL AND CONDENSATE:
Total production (MBBLS) 202 47 249 319 568
Sales price received (per BBL) $ 19.59 20.13 19.70 20.37 20.07
Effects of energy swaps (per BBL) (1) (.66) - (.54) (1.06) (.83)
------- ----- ----- ----- ------
Average sales price (per BBL) $ 18.93 20.13 19.16 19.31 19.24
NATURAL GAS LIQUIDS:
Total production (MBBLS) 29 3 32 100 132
Average sales price (per BBL) $ 9.52 6.67 9.25 9.65 9.55
Total liquids production (MBBLS) 231 50 281 419 700
Average sales price (per BBL) $ 17.75 19.32 18.03 17.01 17.42
Total production (MMCFE) 7,863 1,190 9,053 6,368 15,421
Average sales price (per MCFE) $ 2.19 2.27 2.20 1.81 2.04
Operating expense (per MCFE) .47 .71 .51 .44 .48
------- ----- ----- ----- ------
Netback (per MCFE) $ 1.72 1.56 1.69 1.37 1.56
------- ----- ----- ----- ------
------- ----- ----- ----- ------
</TABLE>
(1) Energy swaps were entered into to hedge the price of spot market volumes
against price fluctuations. Hedged natural gas volumes were 3,589 MMCF
in the three months ended September 30, 1996. Hedged oil and condensate
volumes were 122,000 barrels in the three months ended September 30, 1996.
Aggregate net losses under energy swap agreements were $1,301,000 for the
period.
General and administrative expense was $3,901,000 in the third quarter of
1997 compared to $3,189,000 in the comparable period of 1996. Total overhead
costs (capitalized and expensed general and administrative costs) were
$5,702,000 in the third quarter of 1997 compared to $5,317,000 in the
comparable period of 1996. The increase in total overhead costs is
attributable primarily to a larger number of technical and operating employees
-11-
<PAGE>
who were hired to support the Company's expanded capital budget for
exploration and development. Direct exploration and development expenditures
in the third quarter of 1997 were approximately $28,000,000 compared to
approximately $17,000,000 in the third quarter of 1996.
Interest expense decreased 3% to $5,619,000 in the third quarter of 1997
compared to $5,822,000 in the corresponding 1996 period, due primarily to the
extinguishment of the nonrecourse secured loan with JEDI in the fourth quarter
of 1996, offset in part by increased interest charges on higher average
outstanding balances under bank credit facilities throughout most of the 1997
period.
Depreciation and depletion expense increased 31% to $22,064,000 in the
third quarter of 1997 from $16,873,000 in the third quarter of 1996 due to
higher production and higher per-unit expense. On a per-unit basis, depletion
expense was approximately $1.16 per MCFE in the third quarter of 1997 compared
to $1.03 per MCFE in the corresponding 1996 period. The increase in per-unit
depletion expense results primarily from higher development costs in the U.S.
due to increased costs for services.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
The net loss for the first nine months of 1997 was $10,450,000 or $.32
per common share compared to a net loss of $2,408,000 or $.17 per common share
in the first nine months of 1997. The net loss for the 1997 period includes
an extraordinary loss on the extinguishment of debt of $12,359,000, or $.37
per common share related to the tender offer for the Company's 11-1/4% Senior
Subordinated Notes. Earnings attributable to common stock before
extraordinary item for the first nine months of 1997 were $1,909,000 or $.05
per common share compared to a loss attributable to common stock of $4,027,000
or $.17 per share for the first nine months of 1996. The improved earnings
from continuing operations for the first nine months of 1997 were attributable
primarily to increased production and higher natural gas prices.
The Company's marketing and processing revenue increased 4% to
$140,470,000 in the first nine months of 1997 from $135,614,000 in the eight
months of operations of ProMark subsequent to its purchase on January 31, 1996.
The related marketing and processing expense increased by 4% to $134,268,000 in
the 1997 period from $129,115,000 in the previous year. The gross margin
reported for marketing and processing activities of $6,202,000 in the first
nine months of 1997 was slightly lower than the gross margin of $6,499,000 in
the first nine months of 1996 because the 1996 period included a non-recurring
income item of approximately $350,000 and also had higher third party contract
processing volumes.
The Company's oil and gas sales revenue increased by 27% to $112,225,000
in the first nine months of 1997 compared to $88,062,000 in the first nine
months of 1996. The 1996 period includes eight months of operations of
Canadian Forest subsequent to its purchase on January 31, 1996. The increase
in 1997 is also attributable to increased production volumes and prices.
Production volumes for natural gas in the first nine months of 1997 increased
18% from the comparable 1996 period due primarily to new production from Gulf
of Mexico properties and to nine months of activity for Canadian Forest in 1997
compared to only eight months in 1996. The average sales price received for
natural gas in the first nine months of 1997 increased 11% compared to the
average sales price received in the corresponding 1996 period. Production
volumes for liquids (consisting of oil, condensate and natural gas liquids)
were 23% higher in the first nine months of 1997 than in the first nine months
of 1996, due primarily to new production from Gulf of Mexico and Canadian
properties. The average sales price received by the Company for its liquids
production during the first nine months of 1997 was slightly higher than the
average sales price received during the comparable 1996 period.
Oil and gas production expense of $27,583,000 in the first nine months of
1997 increased 19% from $23,224,000 in the comparable period of 1996 due
primarily to the inclusion of nine months of costs for Canadian Forest in 1997
versus only eight months in 1996, expenses relating to new production from Gulf
of Mexico properties and temporary transportation expenses associated with the
Bigoray field. On an MCFE basis, production expense was $.55 per MCFE in the
first nine months of both 1997 and 1996.
-12-
<PAGE>
The following tables set forth production volumes, weighted average sales
prices and production expenses during the periods as follows:
Nine Months Ended September 30, 1997
--------------------------------------------
Gulf Total Total
Coast Western U.S. Canada Company
----- ------- ----- ------ -------
NATURAL GAS
Total production (MMCF) (1) 23,394 2,023 25,417 10,732 36,149
Sales price received (per MCF) $ 2.37 2.15 2.35 1.43 2.08
Effects of energy swaps
(per MCF)(2) (.16) - (.15) (.01) (.11)
------- ------- ------- ------- -------
Average sales price (per MCF) $ 2.21 2.15 2.20 1.42 1.97
LIQUIDS
OIL AND CONDENSATE:
Total production (MBBLS) 742 84 826 1,131 1,957
Sales price received (per BBL) $ 19.43 20.58 19.54 22.41 21.20
Effects of energy swaps
(per BBL) (2) (.36) - (.32) (.17) (.23)
------- ------- ------- ------- -------
Average sales price (per BBL) $ 19.07 20.58 19.22 22.24 20.97
NATURAL GAS LIQUIDS:
Total production (MBBLS) 87 7 94 322 416
Average sales price (per BBL) $ 8.87 11.29 9.05 12.80 11.95
Total liquids production
(MBBLS) 829 91 920 1,453 2,373
Average sales price (per BBL) $ 17.07 19.00 17.26 17.31 17.29
Total production (MMCFE) 28,368 2,569 30,937 19,450 50,387
Average sales price (per MCFE) $ 2.32 2.37 2.32 2.08 2.23
Operating expense (per MCFE) .46 1.01 .51 .61 .55
------- ------- ------- ------- -------
Netback (per MCFE) $ 1.86 1.36 1.81 1.47 1.68
------- ------- ------- ------- -------
------- ------- ------- ------- -------
(1) Total natural gas production includes scheduled deliveries under
volumetric production payments, net of royalties, of 801 MMCF and natural
gas delivered pursuant to volumetric production payment agreements
represented approximately 4% of total natural gas production. On June
30, 1997 the Company repurchased its last remaining volumetric production
payment.
(2) Energy swaps were entered into to hedge the price of spot market volumes
against price fluctuations. Hedged natural gas volumes were 10,319 MMCF
and hedged oil and condensate volumes were 673,000 barrels. Aggregate net
losses under energy swap agreements were $4,353,000 for the period.
-13-
<PAGE>
Nine Months Ended September 30, 1996
--------------------------------------------
Gulf Total Total
Coast Western U.S. Canada Company
----- ------- ----- ------ -------
NATURAL GAS
Total production (MMCF) 17,360 3,099 20,459 10,206 30,665
Sales price received (per MCF) $ 2.25 1.99 2.22 1.34 1.92
Effects of energy swaps
(per MCF) (1) (.22) - (.19) (.04) (.14)
------- ------ ------ ------ ------
Average sales price (per MCF) $ 2.03 1.99 2.03 1.30 1.78
LIQUIDS
OIL AND CONDENSATE:
Total production (MBBLS) 566 118 684 940 1,624
Sales price received (per BBL) $ 18.56 19.64 18.75 20.01 19.49
Effects of energy swaps
(per BBL) (1) (1.47) - (1.22) (1.40) (1.33)
------- ------ ------ ------ ------
Average sales price (per BBL) $ 17.09 19.64 17.53 18.61 18.16
NATURAL GAS LIQUIDS:
Total production (MBBLS) 72 6 78 231 309
Average sales price (per BBL) $ 9.32 8.50 9.26 12.80 11.90
Total liquids production
(MBBLS) 638 124 762 1,171 1,933
Average sales price (per BBL) $ 16.21 19.10 16.68 17.46 17.16
Total production (MMCFE) 21,188 3,843 25,031 17,232 42,263
Average sales price (per MCFE) $ 2.15 2.22 2.16 1.96 2.08
Operating expense (per MCFE) .57 .68 .58 .50 .55
------- ------ ------ ------ ------
Netback (per MCFE) $ 1.58 1.54 1.58 1.46 1.53
------- ------ ------ ------ ------
------- ------ ------ ------ ------
(1) Total natural gas production includes scheduled deliveries under
volumetric production payments, net of royalties, of 2,657 MMCF and
natural gas delivered pursuant to volumetric production payment agreements
represented approximately 9% of total natural gas production. On June 30,
1997 the Company repurchased its last remaining volumetric production
payment.
(2) Energy swaps were entered into to hedge the price of spot market volumes
against price fluctuations. Hedged natural gas volumes were 9,114 MMCF
and hedged oil and condensate volumes were 719,000 barrels. Aggregate
net losses under energy swap agreements were $6,389,000 for the period.
-14-
<PAGE>
General and administrative expense was $12,448,000 in the first nine
months of 1997 compared to $9,526,000 in the comparable period of 1996. Total
overhead costs (capitalized and expensed general and administrative costs) were
$18,314,000 in the first nine months of 1997 compared to $15,488,000 in the
comparable period of 1996. The increase is primarily attributable to the
inclusion of nine months of costs for Canadian Forest and ProMark in 1997
versus only eight months in 1996, as well as to a larger number of technical
and operating employees who were hired to support the Company's expanded
capital budget for exploration and development. Direct exploration and
development expenditures in the first nine months of 1997 were approximately
$101,000,000 compared to approximately $37,000,000 in the first nine months of
1996.
The following table summarizes the total overhead costs incurred during
the periods:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1997 1996 1997 1996
------ ----- ------ ------
(In Thousands)
Overhead costs capitalized $1,801 2,128 5,866 5,962
General and administrative costs
expensed (1) 3,901 3,189 12,448 9,526
------ ----- ------ ------
Total overhead costs $5,702 5,317 18,314 15,488
------ ----- ------ ------
------ ----- ------ ------
(1) Includes $690,000 and $857,000 related to marketing and processing
operations for the three month periods ended September 30, 1997 and 1996
and $2,152,000 and $2,318,000 for the nine month periods ended September
30, 1997 and 1996.
Interest expense decreased 13% to $15,652,000 in the first nine months of
1997 compared to $18,042,000 in the corresponding 1996 period, due primarily to
the extinguishment of the nonrecourse secured loan with JEDI in the fourth
quarter of 1996, offset in part by increased interest charges on higher average
outstanding balances under bank credit facilities.
Depreciation and depletion expense increased 34% to $58,820,000 in the
first nine months of 1997 from $43,862,000 in the first nine months of 1996
due to higher production and higher per-unit expense. On a per-unit basis,
depletion expense was approximately $1.12 per MCFE in the first nine months of
1997 compared to $.98 per MCFE in the corresponding 1996 period. The increase
in per-unit depletion results primarily from higher development costs in the
U.S. due to increased costs for services. At September 30, 1997 the Company
had undeveloped properties with a cost basis of approximately $66,567,000 which
were excluded from depletion, compared to approximately $50,953,000 at
September 30, 1996. The increase is attributable primarily to costs of
acquiring undeveloped acreage.
The Company was not required to record a writedown of the carrying value
of its United States or Canadian oil and gas properties in the first nine
months of 1997 or 1996. Writedowns of the full cost pools in the United States
and Canada may be required, however, if prices decline, undeveloped property
values decrease, estimated proved reserve volumes are revised downward or costs
incurred in exploration, development, or acquisition activities in the
respective full cost pools exceed the discounted future net cash flows from the
additional reserves, if any, attributable to each of the cost pools.
CHANGES IN ACCOUNTING. In February 1997, the Financial Accounting
Standards Board issued Statement No. 128, "Earnings Per Share" (SFAS No. 128),
which revises the calculation and presentation provisions of Accounting
Principles Board Opinion 15 and related interpretations. SFAS No. 128 is
effective for the Company's fiscal year ending December 31, 1997. Retroactive
application will be required but early adoption is not permitted. The Company
believes the adoption of SFAS No. 128 will not have a significant effect on its
reported earnings per share.
-15-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically addressed its long-term liquidity needs
through the issuance of debt and equity securities, when market conditions
permit, and through the use of bank credit facilities and cash provided by
operating activities.
In 1996 and 1997, the Company completed several transactions that
improved its financial position considerably, including a debt refinancing
completed September 29, 1997.
On January 31, 1996 the Company and Saxon sold 13,200,000 shares of Common
Stock for $11.00 per share in a public offering (the 1996 Public Offering). Of
this amount, 1,060,000 shares were sold by Saxon and 12,140,000 shares were sold
by Forest. The net proceeds to Forest from the issuance of the shares totaled
approximately $125,000,000 after deducting issuance costs and underwriting fees,
and were used, along with an additional approximately $8,300,000 drawn under the
Company's Credit Facility, to complete the purchase of Canadian Forest and
ProMark. The net proceeds to Saxon of approximately $11,000,000 were used to
reduce its bank debt.
On August 1, 1996 Anschutz exercised an option to purchase 2,250,000 shares
of Common Stock for $26,200,000 or approximately $11.64 per share. Proceeds
received by Forest were used primarily to fund a portion of 1996 capital
expenditures.
On November 5, 1996 the Company exchanged 2,000,000 shares of Common Stock
plus approximately $13,500,000 in cash to extinguish approximately $43,000,000
of nonrecourse secured debt owed to JEDI. In connection with this transaction,
Anschutz acquired 1,628,888 shares of Common Stock by exercising warrants to
purchase 388,888 shares of Common Stock at $10.50 per share and by converting
620,000 shares of Forest's Second Series Preferred Stock into 1,240,000 shares
of Common Stock.
On November 14, 1996 the Company filed a shelf registration with the
Securities and Exchange Commission to issue up to $250,000,000 in one or more
forms of debt or equity securities. Except as otherwise provided in an
applicable prospectus supplement, the net proceeds from the sale of the
securities will be used for the acquisition of oil and gas properties, capital
expenditures, the repayment of subordinated debentures or other debt, repayments
of borrowings under revolving credit agreements, or for other general corporate
purposes.
On February 7, 1997 the Company called for redemption all 2,877,673 shares
of its $.75 Convertible Preferred Stock. In response to its call for
redemption, 2,783,945 shares or 96.7% of the shares outstanding were tendered
for conversion into Common Stock on or before the February 21, 1996 deadline.
The remaining 93,728 preferred shares were redeemed by the Company at the
redemption price of $10.06 per share (at a total cost of $942,904) on February
28, 1997. Lehman Brothers Inc. purchased 65,616 shares of Common Stock issued
pursuant to the Shelf Registration Statement to fund the cash requirement of the
redemption in accordance with the terms of its standby purchase agreement with
Forest. This conversion and redemption eliminated all outstanding preferred
stock from the Company's capital structure and eliminates approximately
$2,200,000 of annual preferred dividend payments.
On August 28, 1997 Anschutz acquired 3,500,000 shares of Common Stock
through the exercise of a warrant for $8.60 per share resulting in cash
proceeds to Forest of $30,100,000. The original exercise price was $10.50 per
share. The reduction in the exercise price offered to Anschutz reflected an
approximate 10% present value discount computed to the warrants' expiration
date of July 27, 1999. Proceeds from the exercise were used to reduce
borrowings under the Company's bank credit facilities.
On September 29, 1997, pursuant to a tender offer, $90,233,000 of the
Company's outstanding $100,000,000 aggregate principal amount of 11-1/4%
Senior Subordinated Notes due 2003 was tendered by the holders of the Notes.
The purchase price for each $1,000 principal amount of Notes validly tendered
and accepted was $1,096.96. As a result of the tender offer in the third
quarter of 1997, Forest recorded an extraordinary loss of approximately
$12,359,000 relating to the excess of the tender price over the carrying
amount of the Notes, net of related unamortized debt issuance costs.
On September 29, 1997 the Company's wholly-owned subsidiary, Canadian
Forest, completed an offering of $125,000,000 of its 8-3/4% Senior
Subordinated Notes due 2007, which were sold at 99.745% and guaranteed on a
senior subordinated basis by the Company. A portion of the proceeds was used
to fund the tender offer described above, a portion was used to repay the
outstanding balance under the Canadian Credit facility and the remainder will
be used for working capital and to fund capital expenditures. The effects of
the tender and new offering will result in an estimated $5,000,000 to
$6,000,000 of interest and tax savings.
-16-
<PAGE>
Many of the factors which may affect the Company's future operating
performance and long-term liquidity are beyond the Company's control, including,
but not limited to, oil and natural gas prices, governmental actions and taxes,
the availability and attractiveness of properties for acquisition, the adequacy
and attractiveness of financing and operational results. The Company continues
to examine alternative sources of long-term capital, including bank borrowings,
the issuance of debt instruments, the sale of common stock, preferred stock or
other equity securities of the Company, the issuance of net profits interests,
sales of non-strategic assets, prospects and technical information, or joint
venture financing. Availability of these sources of capital and, therefore, the
Company's ability to execute its operating strategy will depend upon a number of
factors, some of which are beyond the control of the Company. In addition, the
prices the Company receives for its future oil and natural gas production and
the level of the Company's production will significantly impact future operating
cash flows. No prediction can be made as to the prices the Company will receive
for its future oil and gas production. In addition, at October 31, 1997 the
Company has three offshore Gulf of Mexico properties whose combined production
represents approximately 30% of the Company's consolidated daily deliverability.
The Company's production, revenue and cash flow could be adversely affected if
production from these properties decreases to a significant degree.
BANK CREDIT FACILITIES. The Company has a credit agreement with a
syndicate of banks led by The Chase Manhattan Bank (the U.S. Credit Facility).
The U.S. Credit Facility is secured by a lien on, and a security interest in, a
majority of the Company's U.S. proved oil and gas properties and related assets,
pledges of accounts receivable, and a pledge of 66% of the capital stock of
Canadian Forest. Funds under the U.S. Credit Facility can be used for general
corporate purposes. Under the terms of the U.S. Credit Facility, the Company is
subject to certain covenants and financial tests, including restrictions or
requirements with respect to working capital, cash flow, additional debt, liens,
asset sales, investments, mergers, cash dividends and reporting
responsibilities.
A Canadian finance subsidiary of Forest has a credit agreement (the
Canadian Credit Facility) together with the U.S. Credit Facility (the Bank
Credit Facilities) with a syndicate of Canadian banks led by The Chase Manhattan
Bank of Canada for the benefit of Canadian Forest and ProMark. The Canadian
Credit Facility is indirectly secured by substantially all the assets of
Canadian Forest. Funds drawn under the Canadian Credit Facility can be used for
general corporate purposes. Under the terms of the Canadian Credit Facility,
the three Canadian subsidiaries are subject to certain covenants and financial
tests, including restrictions or requirements with respect to working capital,
cash flow, additional debt, liens, asset sales, investments, mergers, cash
dividends and reporting responsibilities.
On August 29, 1997, the Company amended both its U.S. Credit Facility and
its Canadian Credit Facility. The primary purpose of the amendments was to
create one Global Borrowing Base for both facilities. The initial Global
Borrowing Base is $130,000,000, representing an increase of approximately
$20,000,000 from the combined borrowing bases under the previous facilities.
Under the Bank Credit Facilities as amended, the Company will be able to
allocate the Global Borrowing Base between the United States and Canada, subject
to the limitation that borrowings in either the United States or Canada cannot
exceed $100,000,000. In addition to increasing the Company's global borrowing
capability, the amendments provide for a much less restricted ability to move
funds between the United States and Canada, extend the maturity date for both
facilities to August 2001 and require the Company to guarantee the Canadian
Credit Facility. Other major provisions of the credit facilities remain largely
unchanged.
At October 31, 1997, the outstanding borrowings under the U.S. Credit
Facility were $77,100,000 and there were no outstanding borrowings under the
Canadian Credit Facility. The Company has used the U.S. Credit Facility for a
$1,500,000 Letter of Credit. The Company has also used the Canadian Credit
Facility for a Letter of Credit in the amount of $3,274,000.
In addition to the credit facilities described above, Saxon has a credit
facility (the Saxon Credit Facility) with a borrowing base of $39,800,000 CDN.
The loan is subject to semi-annual review and has demand features; however,
repayments are not required provided that borrowings are not in excess of the
borrowing base and Saxon complies with other existing covenants. At October
31, 1997 the outstanding balance under this facility was $30,021,000 CDN.
-17-
<PAGE>
WORKING CAPITAL. The Company had a working capital surplus of
approximately $26,270,000 at September 30, 1997 compared to a deficit of
approximately $12,649,000 at December 31, 1996. The surplus at September 30,
1997 is due primarily to unapplied proceeds from the 8-3/4% Senior Subordinated
Note offering completed on September 29, 1997. These funds are being held for
general corporate purposes.
The Company generally reports working capital deficits at the end of a
period. Such working capital deficits are principally the result of accounts
payable for capitalized exploration and development costs. Settlement of these
payables is funded by cash flow from the Company's operations or, if necessary,
by drawdowns on the Company's long-term bank credit facilities. For cash
management purposes, drawdowns on the credit facilities are not made until the
due dates of the payables.
CASH FLOW. Historically, one of the Company's primary sources of short-
term capital has been net cash provided by operating activities. The following
summary table reflects comparative cash flow data for the Company for the
periods ended September 30, 1997 and 1996.
Nine Months Ended
-----------------------------
September 30, September 30,
1997 1996
--------- --------
(In Thousands)
Net cash provided by operating activities $ 35,043 37,837
Net cash used by investing activities (111,494) (184,724)
Net cash provided by financing activities 92,387 151,278
Net cash provided by operating activities decreased to $35,043,000 in
1997 compared to $37,837,000 in 1996, due primarily to increased production as
well as higher natural gas and liquids prices being more than offset by
the settlement of volumetric production payment obligations. The Company used
$111,494,000 for investing activities in 1997 compared to $184,724,000 in
1996. The 1996 outlays included $136,191,000 for the acquisition of Canadian
Forest, whereas the 1997 outlays consisted primarily of exploration and
development costs. Cash provided by financing activities was $92,387,000 in
1997 compared to $151,278,000 in 1996. The 1997 period included cash inflows
of $121,854,000 from the issuance of the 8-3/4 Senior Subordinated Notes,
$30,100,000 proceeds from a warrant exercise and net bank borrowings of
$41,369,000, offset by a use of cash of $99,195,000 for the redemption of a
portion of the Company's 11-1/4% Senior Subordinated Notes. The 1996 period
included $136,591,000 of net proceeds from a common stock offering.
CAPITAL EXPENDITURES. The Company's expenditures for property
acquisition, exploration and development for the three and nine months ended
September 30, 1997 and 1996 were as follows:
<TABLE>
Three Months Ended Nine Months Ended
---------------------------- ----------------------------
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
------------- ------------- ------------- -------------
(In Thousands)
<S> <C> <C> <C> <C>
Property acquisition costs:
Proved properties $ 2,211 17,236 5,259 139,228
Undeveloped properties 85 - 3,172 17,808
--------- ------- ------- -------
2,296 17,236 8,431 157,036
Exploration costs:
Direct costs 12,785 5,761 51,613 15,401
Overhead capitalized 757 932 2,533 2,128
--------- ------- ------- -------
13,542 6,693 54,146 17,529
Development costs:
Direct costs 15,270 10,842 48,889 21,383
Overhead capitalized 1,044 1,196 3,333 3,834
--------- ------- ------- -------
16,314 12,038 52,222 25,217
--------- ------- ------- -------
$ 32,152 35,967 114,799 199,782
--------- ------- ------- -------
--------- ------- ------- -------
</TABLE>
-18-
<PAGE>
Acquisition of proved properties in the nine months ended September 30,
1996 consists primarily of the allocation of purchase price to the oil and gas
properties acquired in the purchase of Canadian Forest. Direct exploration
costs of $51,613,000 incurred in the nine months ended September 30, 1997
includes approximately $15,000,000 of land and seismic costs, primarily for
acquisition of leases in the Gulf of Mexico, as well as approximately
$37,000,000 expended for drilling and completion on exploratory wells in the
first nine months of 1997, of which a significant portion (approximately 57%)
relates to work at the Company's Eugene Island 53 field.
Direct development spending of $48,889,000 in the first nine months of 1997
includes approximately $21,000,000 for wells and plant facilities at the Bigoray
field operated by Saxon Petroleum, approximately $5,000,000 in the Western
region of U.S. operations and approximately $17,000,000 in the Gulf of Mexico.
The Company's expected 1997 expenditures for exploration and development
are approximately $140,000,000. The Company expects to be able to meet its 1997
capital expenditure financing requirements using cash flows generated by
operations, sales of non-strategic assets and borrowings under existing lines of
credit. There can be no assurance, however, that the Company will have access
to sufficient capital to meet its capital requirements. The planned levels of
capital expenditures could be reduced if the Company experiences lower than
anticipated net cash provided by operations or other liquidity needs or could be
increased if the Company experiences increased cash flow or accesses additional
sources of capital.
In addition, while the Company intends to continue a strategy of acquiring
reserves that meet its investment criteria, no assurance can be given that the
Company can locate or finance any property acquisitions.
LONG-TERM SALES CONTRACTS. A significant portion of Canadian Forest's
natural gas production is sold through the ProMark Netback Pool. At September
30, 1997 the ProMark Netback Pool had entered into fixed price contracts to sell
approximately 3.5 BCF of natural gas through the remainder of 1997 at an average
price of $1.70 CDN per MCF and approximately 13.6 BCF of natural gas in 1998 at
an average price of approximately $1.83 CDN per MCF. Canadian Forest is
obligated to deliver approximately 29% of the volumes of natural gas subject to
these contracts.
HEDGING PROGRAM. In addition to the volumes of natural gas and oil sold
under long-term sales contracts, the Company also uses energy swaps and other
financial agreements to hedge against the effects of fluctuations in the sales
prices for oil and natural gas produced. In a typical swap agreement, the
Company receives the difference between a fixed price per unit of production and
a price based on an agreed upon third-party index if the index price is lower.
If the index price is higher, the Company pays the difference. The Company's
current swaps are settled on a monthly basis. At September 30, 1997 the Company
had natural gas swaps and collars for an aggregate of approximately 33 BBTU
(billion British Thermal Units) per day of natural gas during the remainder of
1997 at fixed prices ranging from $1.16 per MMBTU (million British Thermal
Units) on an Alberta Energy Company "C" (AECO "C") basis to $2.54 per MMBTU on a
New York Mercantile Exchange (NYMEX) basis and an aggregate of approximately 26
BBTU per day of natural gas during 1998 at fixed prices ranging from $1.16 (AECO
"C" basis) to $2.62 (NYMEX basis) per MMBTU. The weighted average hedged price
for natural gas under such agreements is $2.25 and $2.18 per MMBTU in 1997 and
1998, respectively. At September 30, 1997 the Company had oil swaps for an
aggregate of 2,527 barrels per day of oil during the remainder of 1997 at fixed
prices ranging from $18.65 to $21.05 (NYMEX basis) and an aggregate of 545
barrels per day during 1998 at fixed prices of $20.00 and $20.52 (NYMEX basis).
The weighted average hedged price for oil under such agreements is $20.16 and
$20.29 per barrel in 1997 and 1998, respectively.
Subsequent to September 30, 1997 the Company entered into one natural
gas swap that hedges 10,000 MMBTU of natural gas per day from November 1997
through February 1998 at a fixed price of $3.02 per MMBTU (NYMEX basis) and
one oil swap that hedges approximately 250 barrels per day of oil from January
1998 through December 1998 at a fixed price of $21.00 per barrel (NYMEX basis).
GAS BALANCING. It is customary in the industry for various working
interest partners to produce more or less than their entitlement share of
natural gas from time to time. The Company's net overproduced position
decreased in the first nine months of 1997 to approximately 2.2 BCF from
approximately 2.6 BCF at December 31, 1996. At September 30, 1997 the
undiscounted value of this imbalance is approximately $4,673,000, of which
$600,000 is recorded as a short-term liability and the remaining $4,073,000 is
included in other long-term liabilities. In the absence of a gas balancing
agreement, the Company is unable to determine when its partners will
-19-
<PAGE>
make up their share of production. If and when the Company's partners do
make up their share of production, the Company's deliverable natural gas
volumes could decrease, adversely affecting cash flow.
-20-
<PAGE>
PART II. OTHER INFORMATION
ITEM 2c. RECENT SALE OF UNREGISTERED SECURITIES
On August 28, 1997 the Company issued 3,500,000 shares of Common Stock to
Anschutz pursuant to the exercise of warrants at a price of $8.60 per share.
This transaction was exempt from registration under the Securities Act of 1933
(the 33 Act) pursuant to Section 4(2) of the 33 Act.
On September 29, 1997 the Company's wholly-owned subsidiary, Canadian
Forest Oil Ltd., issued in a private placement $125,000,000 aggregate principal
amount of 8-3/4% Senior Subordinated Notes due 2007 at a price of 99.745%. The
payment of these notes is unconditionally guaranteed on a senior subordinated
basis by the Company.
The initial purchasers were Salomon Brothers Inc., Lehman Brothers Inc.,
Chase Securities Inc. and Morgan Stanley & Co. Inc. The aggregate price to
investors was $124,681,250 and the aggregate discounts to the initial
purchasers was $3,125,000. This issuance was exempt from registration under the
33 Act pursuant to Rule 144A of the 33 Act.
-21-
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 4.1 Indenture dated as of September 29, 1997 among
Canadian Forest Oil Ltd., as Issuer, Forest Oil
Corporation, as Guarantor, and State Street Bank
and Trust, as Trustee, incorporated herein by
reference to Exhibit 4.1 to Forest Oil
Corporation's Registration Statement on Form S-4
dated October 31, 1997 (File No. 333-39255).
Exhibit 4.2 Registration Agreement dated September 23, 1997 by
and among Canadian Forest Oil Ltd., Forest Oil
Corporation and Salomon Brothers Inc., Lehman
Brothers Inc., Chase Securities Inc., and Morgan
Stanley & Co. Incorporated, incorporated herein
by reference to Exhibit 4.2 to Forest Oil
Corporation's Registration Statement on Form S-4
dated October 31, 1997 (File No. 333-39255).
Exhibit 4.3 Second Amended and Restated Credit Agreement dated
as of January 31, 1997 between Forest Oil
Corporation and Subsidiary Guarantors and The
Chase Manhattan Bank, as agent, incorporated
herein by reference to Exhibit 4.4 to Form 10-K
for Forest Oil Corporation for the year ended
December 31, 1996 (File No. 0-4597).
Exhibit 4.4.1 Amendment No. 1 to Second Amended and Restated
Credit Agreement dated as of April 1, 1997,
incorporated herein by reference to Exhibit 4.4.1
to Forest Oil Corporation's Registration
Statement on Form S-4 dated October 31, 1997 (File
No. 333-39255).
Exhibit 4.4.2 Amendment No. 2 to Second Amended and Restated
Credit Agreement dated as of August 19, 1997,
incorporated herein by reference to Exhibit 4.4.2
to Forest Oil Corporation's Registration
Statement on Form S-4 dated October 31, 1997
(File No. 333-39255).
Exhibit 4.4.3 Amendment No. 3 to Second Amended and Restated
Credit Agreement dated as of September 26, 1997,
incorporated herein by reference to Exhibit 4.4.3
to Forest Oil Corporation's Registration
Statement on Form S-4 dated October 31, 1997 (File
No. 333-39255).
Exhibit 4.12 Amendment No. 4 dated as of August 19, 1997 to the
Deed of Trust, Mortgage, Security Agreement,
Assignment of Production, Financing Statement
(Personal Property including Hydrocarbons) and
Fixture Filing dated as of December 1, 1993
between Forest Oil Corporation and The Chase
Manhattan Bank, as agent, incorporated herein by
reference to Exhibit 4.12 to Forest Oil
Corporation's Registration Statement on Form S-4
dated October 31, 1997 (File No. 333-39255).
-22-
<PAGE>
Exhibit 4.13 Amendment No. 3 dated as of August 19, 1997 to the
Deed of Trust, Mortgage, Security Agreement,
Assignment of Production, Financing Statement
(Personal Property including Hydrocarbons) and
Fixture Filing dated as of June 3, 1994 between
Forest Oil Corporation and The Chase Manhattan
Bank, as agent, incorporated herein by reference
to Exhibit 4.13 to Forest Oil Corporation's
Registration Statement on Form S-4 dated October 31,
1997 (File No. 333-39255).
Exhibit 4.16 Second Amended and Restated Security Agreement dated
as of January 31, 1997 between Forest Oil
Corporation, the Subsidiary Guarantors named
therein and The Chase Manhattan Bank, as agent,
incorporated herein by reference to Exhibit 4.16
to Forest Oil Corporation's Registration
Statement on Form S-4 dated October 31, 1997
(File No. 333-39255).
*Exhibit 11 Forest Oil Corporation and Subsidiaries - Calculation of
Earnings per Share of Common Stock.
*Exhibit 27 Financial Data Schedule.
* Filed with this report.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed by Forest during the third
quarter of 1997.
-23-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FOREST OIL CORPORATION
(Registrant)
Date: November 13, 1997 /s/ Daniel L. McNamara
--------------------------------------------
Daniel L. McNamara
Corporate Counsel and Secretary
(Signed on behalf of the registrant)
/s/ David H. Keyte
--------------------------------------------
David H. Keyte
Vice President and Chief
Financial Officer
(Principal Financial Officer)
-24-
<PAGE> Exhibit 11
FOREST OIL CORPORATION
Calculation of Earnings (Loss) Per Share of Common Stock
(Unaudited)
<TABLE>
Three Months Ended Nine Months Ended
---------------------------- ----------------------------
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
------------- ------------- ------------- -------------
(In Thousands Except Per Share Amounts)
<S> <C> <C> <C> <C>
Primary earnings (loss) per share:
Net earnings (loss) $(11,776) 879 (10,450) (2,408)
Less dividend requirements on
$.75 Convertible Preferred Stock - (539) (189) (1,619)
-------- ------ ------- ------
Net earnings (loss) attributable to common stock
for primary earnings (loss) per share calculation $(11,776) 340 (10,639) (4,027)
-------- ------ ------- ------
-------- ------ ------- ------
Weighted average number of common
shares outstanding 33,970 26,100 32,776 23,698
-------- ------ ------- ------
-------- ------ ------- ------
Primary earnings (loss) per share of common stock $ (.35) .01 (.32) (.17)
-------- ------ ------- ------
-------- ------ ------- ------
Fully diluted earnings (loss) per share:
Net earnings (loss) attributable to common stock,
as above $(11,776) 340 (10,639) (4,027)
Add dividend requirements on $.75 Convertible
Preferred Stock - 539 189 1,619
-------- ------ ------- ------
Net earnings (loss) attributable to common stock for
fully diluted earnings (loss) per share calculation $(11,776) 879 (10,450) (2,408)
-------- ------ ------- ------
-------- ------ ------- ------
Weighted average number of common shares
outstanding 33,970 26,100 32,776 23,698
Dilutive effect of:
$.75 Convertible Preferred Stock - 2,015 622 2,015
-------- ------ ------- ------
Weighted average number of common shares
outstanding, as adjusted 33,970 28,115 33,398 25,713
-------- ------ ------- ------
-------- ------ ------- ------
* Fully diluted earnings (loss) per share of common
stock $ (.35) .03 (.31) (.09)
-------- ------ ------- ------
-------- ------ ------- ------
</TABLE>
* The fully diluted loss per share is not presented in the Company's financial
statements because the effects of assumed exercises and conversions were
anti-dilutive.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEETS AND CONDENSED CONSOLIDATED STATEMENTS OF
INCOME AND NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ON PAGES 1-7
OF THE COMPANY'S FORM 10-Q FOR THE QUARTERLY PERIOD ENDING SEPTEMBER 30, 1997,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 24,893
<SECURITIES> 0
<RECEIVABLES> 51,558
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 80,904
<PP&E> 1,574,266
<DEPRECIATION> 1,065,016
<TOTAL-ASSETS> 629,135
<CURRENT-LIABILITIES> 54,634
<BONDS> 244,865
0
0
<COMMON> 3,631
<OTHER-SE> 259,633
<TOTAL-LIABILITY-AND-EQUITY> 629,135
<SALES> 252,695
<TOTAL-REVENUES> 254,577
<CGS> 161,851
<TOTAL-COSTS> 174,299
<OTHER-EXPENSES> 58,820
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,652
<INCOME-PRETAX> 5,597
<INCOME-TAX> 3,688
<INCOME-CONTINUING> 1,909
<DISCONTINUED> 0
<EXTRAORDINARY> (12,359)
<CHANGES> 0
<NET-INCOME> (10,450)
<EPS-PRIMARY> (.32)
<EPS-DILUTED> (.32)
</TABLE>
