<PAGE>
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q/A
(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, 1996
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, 1996
- ------------------------------ ----------------
Common Stock, Par Value $.10 Per Share 26,886,451
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<PAGE>
PART I. FINANCIAL INFORMATION
FOREST OIL CORPORATION
Condensed Consolidated Balance Sheets
(Unaudited)
September 30, December 31,
1996 1995
------------- ------------
(In Thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 7,676 3,287
Accounts receivable 46,768 17,395
Other current assets 4,268 2,557
--------- --------
Total current assets 58,712 23,239
Net property and equipment, at cost 436,401 277,599
Investment in affiliate - 11,301
Goodwill and other intangible assets, net 30,138 -
Other assets 7,915 8,904
--------- --------
$ 533,166 321,043
--------- --------
--------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Cash overdraft $ 2,186 2,055
Current portion of long-term debt 2,149 2,263
Current portion of gas balancing
liability 2,240 4,700
Accounts payable 50,583 17,456
Accrued interest 1,506 4,029
Other current liabilities 4,717 1,917
--------- --------
Total current liabilities 63,381 32,420
Long-term debt 189,652 193,879
Gas balancing liability 3,340 3,841
Other liabilities 21,962 22,945
Deferred revenue 8,569 15,137
Deferred income taxes 33,463 353
Minority interest 8,547 8,171
Shareholders' equity:
Preferred stock 24,345 24,359
Common stock 2,686 1,066
Capital surplus 397,117 241,241
Common shares to be issued in debt
restructuring - 6,073
Accumulated deficit (219,906) (217,495)
Foreign currency translation 10 (1,407)
Treasury stock, at cost - (9,540)
--------- --------
Total shareholders' equity 204,252 44,297
--------- --------
$ 533,166 321,043
--------- --------
--------- --------
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,
1996 1995 1996 1995
------------- ------------- ------------- -------------
(In Thousands Except Production and Per Share Amounts)
<S> <C> <C> <C> <C>
PRODUCTION
Gas, including deliveries under volumetric
production payments (mmcf) 11,221 7,807 30,665 25,744
------- ------ ------- -------
------- ------ ------- -------
Oil, condensate and natural gas
liquids (thousands of barrels) 700 275 1,933 926
------- ------ ------- -------
------- ------ ------- -------
STATEMENTS OF CONSOLIDATED OPERATIONS
Revenue:
Marketing and processing $52,025 - 135,614 -
Oil and gas sales:
Gas 19,262 13,139 54,729 45,141
Oil, condensate and natural gas liquids 12,278 4,317 33,333 15,013
------- ------ ------- -------
Total oil and gas sales 31,540 17,456 88,062 60,154
Miscellaneous, net 404 161 707 374
------- ------ ------- -------
Total revenue 83,969 17,617 224,383 60,528
Expenses:
Marketing and processing 49,950 - 129,115 -
Oil and gas production 7,368 5,379 23,224 16,576
General and administrative 3,189 1,900 9,526 5,761
Interest 5,822 6,679 18,042 19,100
Depreciation and depletion 16,873 10,233 43,862 33,631
------- ------ ------- -------
Total expenses 83,202 24,191 223,769 75,068
------- ------ ------- -------
Income (loss) before income taxes
and minority interest 767 (6,574) 614 (14,540)
Income tax expense (benefit):
Current (350) - 2,217 (7)
Deferred 295 - 1,033 -
------- ------ ------- -------
(55) - 3,250 (7)
Minority interest in loss of subsidiary 57 - 228 -
------- ------ ------- -------
Net earnings (loss) $ 879 (6,574) (2,408) (14,533)
------- ------ ------- -------
------- ------ ------- -------
Weighted average number of common
shares outstanding 26,100 8,462 23,698 6,611
------- ------ ------- -------
------- ------ ------- -------
Net earnings (loss) attributable to
common stock $ 340 (7,114) (4,027) (16,153)
------- ------ ------- -------
------- ------ ------- -------
Primary and fully diluted earnings (loss)
per common share $ .01 (.84) (.17) (2.44)
------- ------ ------- -------
------- ------ ------- -------
</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,
1996 1995
------------- -------------
(In Thousands)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (2,408) (14,533)
Adjustments to reconcile net loss to net
cash provided (used) by operating
activities:
Depreciation and depletion 43,862 33,631
Deferred income tax expense 1,033 -
Minority interest in loss of subsidiary (228) -
Other, net 3,967 2,596
(Increase) decrease in accounts receivable (8,395) 5,119
Decrease in other current assets (133) (1,268)
Increase (decrease) in accounts payable 7,745 (6,854)
Increase in accrued interest and other
current liabilities (1,169) (5,537)
Amortization of deferred revenue (6,568) (17,407)
-------- -------
Net cash provided (used) by operating
activities 37,706 (4,253)
Cash flows from investing activities:
Capital expenditures for property and
equipment (63,673) (20,405)
Proceeds of sales of property and equipment 15,072 2,706
Acquisition of subsidiary:
Property and equipment (113,972) -
Goodwill and other intangible assets (24,684) -
Noncash working capital 1,258 -
Long-term assets and liabilities, net 1,207 -
Decrease in other assets, net 71 464
-------- -------
Net cash used by investing activities (184,721) (17,235)
Cash flows from financing activities:
Proceeds from bank borrowings 150,453 61,200
Repayments of bank borrowings (155,418) (74,400)
Proceeds from common stock offering, net of
offering costs 136,591 -
Proceeds of warrant exercise 26,187 -
Proceeds of stock issued, net of costs - 41,060
Repayments of nonrecourse secured loan (486) (1,143)
Repayments of production payment obligation (2,435) (1,708)
Payment of preferred stock dividends (539) (540)
Debt issuance costs (3) (482)
Increase (decrease) in cash overdraft 131 (2,706)
Increase (decrease) in other liabilities, net (3,075) 756
-------- -------
Net cash provided by financing
activities 151,406 22,037
Effect of exchange rate changes on cash (2) (1)
-------- -------
Net increase in cash and cash equivalents 4,389 548
Cash and cash equivalents at beginning of period 3,287 2,869
-------- -------
Cash and cash equivalents at end of period $ 7,676 3,417
-------- -------
-------- -------
Cash paid during the period for:
Interest $ 13,670 19,002
-------- -------
-------- -------
Income taxes $ 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, 1996 and 1995
(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, 1996
and the results of its operations for the nine month periods ended
September 30, 1996 and 1995. Quarterly results are not necessarily
indicative of expected annual results because of the impact of fluctuations
in prices received for 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, included in the Company's annual
report on Form 10-K for the year ended December 31, 1995, filed with the
Securities and Exchange Commission.
(2) Acquisitions
On December 20, 1995 the Company purchased a 56% economic (49% voting)
interest in Saxon Petroleum Inc. (Saxon) of Calgary, Alberta for
approximately $22,000,000. In the transaction, Forest received from
Saxon 40,800,000 voting common shares, 12,300,000 nonvoting common
shares, 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. (Archean), issued to Saxon
1,060,000 common shares of Forest and paid Saxon $1,500,000 CDN.
The Forest common shares held by Saxon were recorded as treasury stock on
Forest's consolidated balance sheet at December 31, 1995. In January
1996, Saxon sold these shares in a public offering of Forest common stock
(the 1996 Public Offering) and used the proceeds to reduce its bank debt.
In September 1996, the preferred shares of Archean were redeemed for
$15,000,000 CDN.
On January 31, 1996 the Company acquired ATCOR Resources Ltd. (ATCOR) 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 the 1996 Public 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.
The consolidated balance sheet of Forest includes the accounts of Saxon
and Canadian Forest at September 30, 1996. The consolidated statement of
operations includes 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 assumes that the common stock offering and the
acquisitions of Saxon and Canadian Forest occurred as of January 1, 1995.
-4-
<PAGE>
(2) Acquisitions (continued)
Pro Forma Three Months Pro Forma Nine Months
Ended September 30, Ended September 30,
---------------------- ---------------------
1996 1995 1996 1995
------- ------ ------- -------
(In Thousands, Except Per Share Amounts)
Revenue:
Marketing and processing $52,025 42,104 148,955 105,630
Oil and gas sales 31,540 28,762 91,772 95,219
Miscellaneous, net 404 161 707 374
------- ------ ------- -------
Total revenue $83,969 71,027 241,434 201,223
------- ------ ------- -------
------- ------ ------- -------
Net earnings (loss) $ 879 (6,102) (2,026) (13,471)
------- ------ ------- -------
------- ------ ------- -------
Primary and fully diluted
earnings (loss) per share $ .01 (.28) (.15) (.70)
------- ------ ------- -------
------- ------ ------- -------
(3) Common Stock
On January 31, 1996, 13,200,000 shares of common stock were sold for
$11.00 per share in 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 and Saxon from the issuance of shares totalled
approximately $136,590,000 after deducting issuance costs and
underwriting fees.
On August 1, 1996 The Anschutz Corporation exercised its option to
purchase 2,250,000 shares of Forest's common stock for $26,200,000 or
approximately $11.64 per share. The option was scheduled to expire on
July 27, 1998.
See Note 7 below for additional common stock transactions.
(4) Net Property and Equipment
The components of net property and equipment are as follows:
September 30, December 31,
1996 1995
------------- ------------
(In Thousands)
Oil and gas properties $1,417,102 1,216,027
Buildings, transportation and
other equipment 10,756 10,502
---------- ---------
1,427,858 1,226,529
Less accumulated depreciation,
depletion and valuation allowance (991,457) (948,930)
---------- ---------
$ 436,401 277,599
---------- ---------
---------- ---------
-5-
<PAGE>
(5) Long-term Debt
The components of long-term debt are shown below. The pro forma balances
at September 30, 1996 give effect to the JEDI and Anschutz transactions decribed
in Note 7 below:
Pro Forma
September 30, September 30, December 31,
1996 1996 1995
------------- ------------- ------------
(In Thousands)
U.S. Credit Facility $ 8,863 - 23,800
Canadian Credit Facility 36,122 36,122 -
Saxon Credit Facility 43 43 16,437
Nonrecourse secured loan - 42,446 40,322
Production payment obligation 13,783 13,783 16,218
11-1/4% Senior Subordinated Notes 99,407 99,407 99,365
-------- ------- -------
158,218 191,801 196,142
Less current portion (2,149) (2,149) (2,263)
-------- ------- -------
Long-term debt $156,069 189,652 193,879
-------- ------- -------
-------- ------- -------
(6) 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 debentures were converted at the beginning of
each period or date of issuance, if later, with earnings being increased
for interest expense, net of taxes, that would not have been incurred had
conversion taken place, (ii) that convertible preferred stock was
converted at the beginning of each period or date of issuance, if later,
and (iii) any additional dilutive effect of stock options and warrants.
The effects of the assumed exercises and conversions were antidilutive
for the three and nine months ended September 30, 1996 and 1995.
(7) Subsequent Event
On November 5, 1996 the Company exchanged 2,000,000 shares of its common
stock plus approximately $13,500,000 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. The JEDI debt bore
interest at the rate of 12-1/2% per annum.
The fair value of the shares of common stock issued to JEDI was estimated
based on the quoted market price of the common stock at the date of the
transaction, less a discount of 7-1/2% to reflect the lock-up agreement
with JEDI that limited JEDI's ability to transfer the shares before May 31,
1997, the size of the block of shares to be issued and the estimated
brokerage fees on the ultimate disposition of the shares. The fair value of
the common stock issued and the cash paid to JEDI, including related
expenses of the transaction, was less than the carrying amount of the debt
extinguished. Accordingly, the Company expects to record an extraordinary
gain on extinguishment of debt in the fourth quarter of 1996 of
approximately $2,166,000.
In connection with this transaction, The Anschutz Corporation (Anschutz)
acquired 1,628,888 shares of Forest's common stock by exercising warrants
for 388,888 shares of common stock at $10.50 per share and converting
620,000 shares of Forest's Second Series Preferred Stock for 1,240,000
shares of common stock, which are subject to a lock-up agreement through
May 1997. The term of the remaining 3,500,000 warrants held by Anschutz
was extended through July 27, 1999.
-6-
<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
This report on Form 10-Q includes "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1993, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. All statements other
than statements of historical fact included in this Form 10-Q, including,
without limitation, statements contained in this "Management's Discussion and
Analysis of Financial Condition and Results of Operations" regarding the
Company's financial position, business strategy, plans and objectives of
management of the Company for future operations and industry conditions, are
forward-looking statements. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to have been correct.
RESULTS OF OPERATIONS FOR THE THIRD QUARTER OF 1996
NET EARNINGS
Net earnings for the third quarter of 1996 were $879,000 or $.01 per common
share compared to a net loss of $6,574,000 or $.84 per common share in the third
quarter of 1995. The improved results for the third quarter of 1996 were
attributable primarily to increased natural gas and liquids prices as well as
increased natural gas and liquids production as a result of the acquisitions of
Saxon Petroleum Inc. (Saxon) and Canadian Forest Oil Ltd. (Canadian Forest),
which were completed in December 1995 and January 1996, respectively, and the
contribution made by Forest's Canadian marketing and processing subsidiary
(ProMark), which was also acquired in January 1996. Decreased oil and natural
gas volumes and lower natural gas prices in the third quarter of 1995
contributed to the 1995 loss.
REVENUE
In the third quarter of 1996, the Company recorded $52,025,000 of marketing
and processing revenue, which relates primarily to the marketing activities of
ProMark subsequent to its purchase on January 31, 1996.
The Company's oil and gas sales revenue increased by 81% to $31,540,000 in
the third quarter of 1996 from $17,456,000 in the third quarter of 1995.
Production volumes for natural gas in the third quarter of 1996 increased 44%
from the comparable 1995 period due primarily to production increases associated
with the newly-acquired Canadian properties and commencement of production from
the Company's High Island 116 platform, partially offset by anticipated
production declines in the United States. The average sales price received for
natural gas in the third quarter of 1996 increased 2% compared to the average
sales price received in the corresponding 1995 period. Production volumes for
liquids (consisting of oil, condensate and natural gas liquids) were 155% higher
in the third quarter of 1996 than in the third quarter of 1995 due primarily to
production increases associated with the newly-acquired Canadian properties.
The average sales price received by the Company for its liquids production
during the third quarter of 1996 increased 13% compared to the average sales
price received during the comparable 1995 period.
-7-
<PAGE>
Production volumes and weighted average sales prices during the periods
were as follows:
<TABLE>
Three Months Ended September 30,
--------------------------------------------------
1996 1995
---------------------------------- -------------
United States Canada Total United States
<S> <C> <C> <C> <C>
Natural Gas
-----------
Total production (MMCF) (1) (4) 7,367 3,854 11,221 7,807
Sales price received (per MCF) $ 2.11 1.20 1.80 1.54
Effects of energy swaps
(per MCF) (2) (.09) (.06) (.08) .14
------ ----- ----- -----
Average sales price (per MCF) $ 2.02 1.14 1.72 1.68
Liquids
-------
Oil and condensate:
Total production (MBBLS) (3) 249 319 568 262
Sales price received (per BBL) $19.66 20.37 20.07 15.60
Effects of energy swaps
(per BBL) (2) (.53) (1.06) (.83) (.21)
------ ----- ----- -----
Average sales price (per BBL) $19.13 19.31 19.24 15.39
Natural gas liquids:
Total production (MBBLS) 32 100 132 13
Average sales price (per BBL) $ 9.31 9.65 9.55 15.62
Total liquids production (MBBLS) 281 419 700 275
Average sales price (per BBL) $18.02 17.01 17.42 15.40
</TABLE>
(1) Total natural gas production includes scheduled deliveries under volumetric
production payments, net of royalties, of 575 MMCF and 2,244 MMCF in 1996
and 1995, respectively. Natural gas delivered pursuant to volumetric
production payment agreements represented approximately 5% and 28% of total
natural gas production in 1996 and 1995, respectively.
(2) Energy swaps were entered into to hedge the price of spot market volumes
against price fluctuation. Hedged natural gas volumes were 3,589 MMCF and
2,070 MMCF for 1996 and 1995, respectively. Hedged oil and condensate
volumes were 122,000 barrels and 129,000 barrels for 1996 and 1995,
respectively. Aggregate losses under energy swap agreements were $1,301,000
in 1996 compared to an aggregate gain of $1,001,000 in 1995.
(3) An immaterial amount of oil production is covered by scheduled deliveries
under volumetric production payments.
-8-
<PAGE>
EXPENSES
In the third quarter of 1996 the Company recorded $49,950,000 of marketing
and processing expense, which relates primarily to the marketing activities of
ProMark subsequent to its purchase on January 31, 1996.
Oil and gas production expense of $7,368,000 in the third quarter of 1996
increased 37% from $5,379,000 in the comparable period of 1995 due primarily to
production expenses associated with newly-acquired Canadian properties. On an
MCFE basis (MCFE means thousands of cubic feet of natural gas equivalents, using
a conversion ratio of one barrel of oil to six MCF of natural gas), production
expense decreased approximately 16% in the third quarter of 1996 to $.48 per
MCFE from $.57 per MCFE in the third quarter of 1995. The decrease is due
primarily to lower per-unit costs in the United States as a result of new
offshore production which came on-line in the third quarter of 1996.
General and administrative expense was $3,189,000 in the third quarter of
1996, an increase of 68% from $1,900,000 in the comparable period of 1995.
Total overhead costs (capitalized and expensed general and administrative costs)
of $5,317,000 in the third quarter of 1996 increased 73% from $3,070,000 in the
comparable period of 1995. The increase is due to the addition of Canadian
operations, which increased Forest's salaried workforce to 180 at December 30,
1996 compared to 115 at December 31, 1995.
Interest expense decreased 13% to $5,822,000 in the third quarter of 1996
compared to $6,679,000 in the corresponding 1995 period, due primarily to lower
effective interest rates on nonrecourse debt.
Depreciation and depletion expense increased 65% to $16,873,000 in the
third quarter of 1996 from $10,233,000 in the third quarter of 1995. On a
per-unit basis, depletion expense was approximately $1.03 per MCFE in the
third quarter of 1996 compared to $1.07 per MCFE in the corresponding 1995
period. The decrease in per unit depletion expense is the result of lower
than average cost of reserves acquired in Canada, partially offset by higher
anticipated future development costs in the United States due to increased
costs for services.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
NET LOSS
The net loss for the first nine months of 1996 was $2,408,000 or $.17 per
common share compared to a net loss of $14,533,000 or $2.44 per common share in
the first nine months of 1995. The improved results for the first nine months
of 1996 were attributable primarily to increased natural gas and liquids prices
as well as increased natural gas and liquids production as a result of the
acquisitions of Saxon and Canadian Forest and the contribution made by ProMark.
Decreased oil and natural gas volumes and lower natural gas prices in the first
nine months of 1995 contributed to the 1995 loss.
REVENUE
In the first nine months of 1996, the Company recorded $135,614,000 of
marketing and processing revenue, which relates primarily to the marketing
activities of ProMark subsequent to its purchase on January 31, 1996.
The Company's oil and gas sales revenue increased by 46% to $88,062,000 in
the first nine months of 1996 from $60,154,000 in the first nine months of 1995.
Production volumes for natural gas in the first nine months of 1996 increased
19% from the comparable 1995 period due primarily to production increases
associated with the newly-acquired Canadian properties, partially offset by
anticipated production declines in the United States. The average sales price
received for natural gas in the first nine months of 1996 increased 2% compared
to the average sales price received in the corresponding 1995 period.
Production volumes for liquids (consisting of oil, condensate and natural gas
liquids) were 109% higher in the first nine months of 1996 than in the first
nine months of 1995 due primarily to production increases associated with the
newly-acquired Canadian properties. The average sales price received by the
Company for its liquids production during the first nine months of 1996
increased 8% compared to the average sales price received during the comparable
1995 period.
-9-
<PAGE>
Production volumes and weighted average sales prices during the periods
were as follows:
<TABLE>
Nine Months Ended September 30,
---------------------------------------------------------
1996 1995
--------------------------------------- -------------
United States Canada(4) Total United States
<S> <C> <C> <C> <C>
Natural Gas
-----------
Total production (MMCF) (1) 20,459 10,206 30,665 25,744
Sales price received (per MCF) $ 2.22 1.34 1.92 1.60
Effects of energy swaps (per MCF) (2) (.19) (.04) (.14) .15
------- ----- ----- -----
Average sales price (per MCF) $ 2.03 1.30 1.78 1.75
Liquids
-------
Oil and condensate:
Total production (MBBLS) (3) 684 940 1,624 886
Sales price received (per BBL) $ 18.74 20.01 19.49 16.45
Effects of energy swaps (per BBL) (2) (1.22) (1.40) (1.33) (.51)
------- ----- ----- -----
Average sales price (per BBL) $ 17.52 18.61 18.16 15.94
Natural gas liquids:
Total production (MBBLS) 78 231 309 40
Average sales price (per BBL) $ 9.31 12.80 11.90 15.93
Total liquids production (MBBLS) 762 1,171 1,933 926
Average sales price (per BBL) $ 16.68 17.46 17.16 15.94
</TABLE>
(1) Total natural gas production includes scheduled deliveries under volumetric
production payments, net of royalties, of 2,657 MMCF and 7,723 MMCF in 1996
and 1995, respectively. Natural gas delivered pursuant to volumetric
production payment agreements represented approximately 9% and 30% of total
natural gas production in 1996 and 1995, respectively.
(2) Energy swaps were entered into to hedge the price of spot market volumes
against price fluctuation. Hedged natural gas volumes were 9,114 MMCF and
7,562 MMCF for 1996 and 1995, respectively. Hedged oil and condensate
volumes were 719,000 barrels and 378,000 barrels for 1996 and 1995,
respectively. Aggregate losses under energy swap agreements were
$6,389,000 in 1996 compared to an aggregate gain of $3,289,000 in 1995.
(3) An immaterial amount of oil production is covered by scheduled deliveries
under volumetric production payments.
(4) Royalty adjustments in Canada for the first nine months of 1996 did not
have a significant effect on reported volumes or average sales prices for
natural gas or oil and condensate. Production of natural gas liquids was
reduced by 79,000 barrels as a result of royalty adjustments, resulting
in an increase in the reported average sales price for natural gas liquids
to $12.80 per barrel from $9.31 or by approximately 37%. The effect on
the average sales price for total liquids production was an increase to
$17.46 per barrel from $16.02, or approximately 9%. The changes in Canadian
royalty amounts and volumes are sensitive to changing prices, the effects
of estimates, and revisions to information received from third parties.
Alberta's restructured royalty program commenced in 1994 and remained
uncertain throughout much of 1995. Canadian Forest continues to receive
additional information with respect to royalty calculations and
anticipates that revisions to such calculations will continue to occur
throughout 1996 and possibly 1997. The effects of future royalty
adjustments cannot be predicted at this time.
-10-
<PAGE>
EXPENSES
In the first nine months of 1996 the Company recorded $129,115,000 of
marketing and processing expense, which relates primarily to the marketing
activities of ProMark subsequent to its purchase on January 31, 1996.
Oil and gas production expense of $23,224,000 in the first nine months of
1996 increased 40% from $16,576,000 in the comparable period of 1995 due
primarily to production expenses associated with the newly-acquired Canadian
properties. On an MCFE basis, production expense increased approximately 4% in
the first nine months of 1996 to $.55 per MCFE from $.53 per MCFE in the first
nine months of 1995. The increase is due primarily to higher per-unit costs in
the United States where fixed costs are being allocated over a lower production
base.
General and administrative expense was $9,526,000 in the first nine months
of 1996, an increase of 65% from $5,761,000 in the comparable period of 1995.
Total overhead costs (capitalized and expensed general and administrative costs)
of $15,488,000 in the first nine months of 1996 increased 53% from $10,130,000
in the comparable period of 1995. The increase is due to the addition of
Canadian operations, which increased Forest's salaried workforce to 180 at
September 30, 1996 compared to 115 at December 31, 1995.
The following table summarizes the total overhead costs incurred during the
periods:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1996 1995 1996 1995
---- ---- ---- ----
(In Thousands)
Overhead costs capitalized $2,128 1,170 5,962 4,369
General and administrative costs
expensed (1) 3,189 1,900 9,526 5,761
------ ----- ------ ------
Total overhead costs $5,317 3,070 15,488 10,130
------ ----- ------ ------
------ ----- ------ ------
(1) Includes $857,000 and $2,318,000 related to marketing and processing
operations for the three and nine month periods ended September 30,
1996, respectively.
Interest expense was $18,042,000 and $19,100,000 in the first nine months
of 1996 and 1995, respectively.
Depreciation and depletion expense increased 30% to $43,862,000 in the
first nine months of 1996 from $33,631,000 in the first nine months of 1995. On
a per-unit basis, depletion expense was approximately $.98 per MCFE in the first
nine months of 1996 compared to $1.06 per MCFE in the corresponding 1995 period.
The decrease in per unit depletion expense is the result of lower than average
cost of reserves acquired in Canada, partially offset by higher anticipated
future development costs in the United States due to increased costs for
services. At September 30, 1996, the Company had undeveloped properties with a
cost basis of approximately $50,953,000 which were excluded from depletion,
compared to $31,981,000 at September 30, 1995. The increase is due primarily to
the acquisition of undeveloped properties in the Canadian Forest purchase.
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
1996 or 1995. Writedowns of the full cost pools in the United States and Canada
may be required, however, if prices 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.
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CHANGES IN ACCOUNTING
In March 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets to Be Disposed Of" (SFAS No. 121). Oil and gas properties
accounted for under the full cost method of accounting are excluded from the
scope of SFAS No. 121, but will continue to be subject to the ceiling test
limitation. SFAS No. 121 requires that impairment losses be recorded on
other long-lived assets used in operations when indicators of impairment are
present and either the undiscounted future cash flows estimated to be
generated by those assets or the fair market value are less than the assets'
carrying amount. SFAS No. 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. The Company adopted SFAS No. 121
effective January 1, 1996. The effect of such adoption was not material.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock
Based Compensation" (SFAS No. 123), was issued by the Financial Accounting
Standards Board in October 1995. SFAS No. 123 establishes financial accounting
and reporting standards for stock-based employee compensation plans as well as
transactions in which an entity issues its equity instruments to acquire goods
or services from non-employees. The Company adopted SFAS No. 123 effective
January 1, 1996, and will continue to use the measurement method prescribed by
APB Opinion 25, as permitted under SFAS No. 123. The Company will include the
pro forma disclosures required by SFAS No. 123 in the notes to future financial
statements.
LIQUIDITY AND CAPITAL RESOURCES
During 1995 the Company took various steps and committed to various actions
to improve its liquidity and capital resources. In early 1995, in response to
market conditions, the Company reduced its general and administrative
expenditures through a workforce reduction effective March 1, 1995. In
addition, the Company reduced its capital expenditures during the first six
months of 1995. In July 1995, the Company received $45,000,000 of equity
capital from The Anschutz Corporation (Anschutz) and restructured $62,400,000 of
indebtedness to Joint Energy Development Investments Limited Partnership (JEDI),
a Delaware limited partnership the general partner of which is an affiliate of
Enron Corp. (Enron).
In December 1995 and January 1996, the Company completed the acquisitions
of Saxon and Canadian Forest. For a description of these transactions, see
Note 2 of Notes to Condensed Consolidated Financial Statements.
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 nonrecourse production-based financing. On
January 31, 1996, the Company 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 totalled
approximately $125,600,000 after deducting issuance costs and underwriting fees
and were used, along with an additional approximately $8,300,000 drawn from the
Company's Credit Facility, to complete the purchase of Canadian Forest and
ProMark. The net proceeds to Saxon of approximately $11,046,000 were used to
reduce its bank debt.
On August 1, 1996 The Anschutz Corporation exercised its option to purchase
2,250,000 shares of Forest's common stock for $26,200,000 or approximately
$11.64 per share. The option was scheduled to expire on July 27, 1998.
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 its common
stock plus approximately $13,500,000 cash to extinguish approximately
$43,000,000 of non-recourse secured debt owed to JEDI. As a part of this
transaction, Anschutz acquired 1,628,888 shares of Forest's common stock by
exercising warrants for 388,888 shares of common stock at $10.50 per share and
converting 620,000 shares of Forest's Second Series Preferred Stock for
1,240,000 shares of common stock. The JEDI debt bore interest at the rate of
12-1/2% per annum. The effect of these transactions with Anschutz and JEDI was
to reduce the Company's debt to capitalization ratio to 40%, on a pro forma
basis, from 48% at September 30, 1996.
As a result of the above, Forest's financial position and liquidity have
improved considerably. The Company expects to be able to meet its 1996 and 1997
capital expenditure financing requirements using cash flows generated by
operations and borrowings under existing lines of credit. However, there can be
no assurance that the Company will have access to sufficient capital to meet its
capital requirements. The planned levels of capital
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<PAGE>
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. The prices the
Company receives for its future oil and natural gas 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.
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 or the issuance of debt instruments, the
sale of production payments or other nonrecourse financing, the sale of
Common Stock, preferred stock or other equity securities of the Company, the
issuance of net profits interests, sales of non-strategic properties,
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.
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 and 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, or
repayments of borrowings under revolving credit agreements or for other general
corporate purposes.
CASH FLOW
Historically, one of the Company's primary sources of capital has been cash
provided by operating activities. The following summary table reflects
comparative cash flow data for the Company for the periods ended September 30,
1996 and 1995.
Nine Months Ended September 30,
-------------------------------
1996 1995
--------------- -------------
(In Thousands)
Net cash provided (used) by operating
activities $ 37,706 (4,253)
Net cash used by investing activities (184,721) (17,235)
Net cash provided by financing activities 151,406 22,037
Net cash provided by operating activities increased to $37,706,000 in the
first nine months of 1996 compared to a net use of cash for operating activities
of $4,253,000 in the first nine months of 1995, due to the higher natural gas
prices, increased production, marketing and processing income and an increase in
accounts payable during the 1996 period as compared to a decrease in accounts
payable during the 1995 period. The Company used $184,721,000 for investing
activities in the first nine months of 1996 compared to $17,235,000 in the
comparable period of the prior year. The increase is due primarily to the use
of funds to acquire Canadian Forest. Cash provided by financing activities was
$151,406,000 in the first nine months of 1996 compared to $22,037,000 in the
comparable period of the prior year. The increase is due primarily to the net
proceeds received from the 1996 Public Offering.
WORKING CAPITAL
The Company had a working capital deficit of approximately $4,669,000 at
September 30, 1996, compared to a deficit of approximately $9,181,000 at
December 31, 1995. The decrease in the deficit is attributable primarily to an
increase in accounts receivable as a result of higher product prices and
volumes, offset by an increase in accounts payable related to exploration and
development costs.
The Company generally reports a working capital deficit at the end of a
period. The working capital deficit is 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.
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<PAGE>
At September 30, 1996 the Company had sufficient borrowing capacity under
its long-term bank credit facilities to fund the working capital deficit at
that date.
HEDGING PROGRAM
In addition to the volumes of natural gas and oil dedicated to volumetric
production payments, the Company has also used energy swaps and other financial
agreements to hedge against the effects of fluctuations in the sales prices for
oil and natural gas. 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. At September 30, 1996, the Company
had natural gas swaps and collars for an aggregate of approximately 38.7 BBTU
(billion British Thermal Units) per day of natural gas during the remainder of
1996 at fixed prices ranging from $1.14 per MMBTU (million British Thermal
Units) on an Alberta Energy Company "C" (AECO "C") basis to $2.73 per MMBTU on a
New York Mercantile Exchange (NYMEX) basis and an aggregate of approximately
27.1 BBTU per day of natural gas during 1997 at fixed prices ranging from $1.14
(AECO "C" basis) to $2.73 (NYMEX basis) per MMBTU. At September 30, 1996 the
Company had oil swaps for an aggregate of 1,326 barrels per day of oil during
the remainder of 1996 at fixed prices ranging from $17.90 to $19.13 per barrel
(NYMEX basis), and an aggregate of 1,965 barrels per day of oil during 1997 at
fixed prices ranging from $17.90 to $21.05 per barrel (NYMEX basis). The
Company's current swaps are settled on a monthly basis.
CAPITAL EXPENDITURES
The Company's expenditures for property acquisition, exploration and
development for the first six months of 1996 and 1995 were as follows:
Nine Months Ended September 30,
-------------------------------
1996 1995
-------- -------
(In Thousands)
Property acquisition costs:
Proved properties $ 20,445 199
Undeveloped properties - 192
-------- ------
20,445 391
Exploration costs:
Direct costs 16,413 7,482
Overhead capitalized 2,128 600
-------- ------
18,541 8,082
Development costs:
Direct costs 20,371 8,032
Overhead capitalized 3,834 3,769
-------- ------
24,205 11,801
-------- ------
$ 63,191 20,274
-------- ------
-------- ------
The Company's 1996 expected capital expenditures total approximately
$105,000,000, including capitalized overhead of approximately $8,000,000. This
amount represents a significant increase compared to original estimates. The
Company's 1996 direct expenditures for exploration and development are expected
to total approximately $70,000,000. The Company also estimates that its 1997
capital program for exploration and development is expected to include direct
expenditures in excess of $100,000,000 of which approximately two-thirds will be
expended in the United States and one-third in Canada.
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. If adequate sources of
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<PAGE>
capital are not available to the Company in 1996 and 1997, the amount
currently expected to be invested in exploration, development and reserve
acquisitions will be required to be reduced significantly.
BANK CREDIT FACILITIES
CREDIT FACILITY. The Company has a secured credit facility (the Credit
Facility) with The Chase Manhattan Bank, NA. (Chase) as agent for a group of
banks. Under the Credit Facility as amended, the Company may borrow up to
$40,000,000 for working capital and/or general corporate purposes. The
borrowing base is subject to formal redeterminations semi-annually, but may be
changed at the banks' discretion at any time.
The Credit Facility is secured by a lien on, and a security interest in, a
majority of the Company's proved oil and gas properties and related assets
(subject to prior security interests granted to holders of volumetric production
payment agreements), a pledge of accounts receivable, material contracts and the
stock of material subsidiaries. The maturity date of the Credit Facility is
July 1, 1998. Under the terms of the 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. At
November 8, 1996 there was $19,200,000 outstanding under this facility. The
Company has also used the facility for a $1,500,000 letter of credit.
CANADIAN CREDIT FACILITY. On February 8, 1996 a newly-formed Canadian
subsidiary of Forest entered into a credit agreement (the Canadian Credit
Facility) with The Chase Manhattan Bank of Canada for the benefit of Canadian
Forest and ProMark. The initial borrowing base under the Canadian Credit
Facility is $60,000,000 CDN. The borrowing base is subject to formal
redeterminations semi-annually, but may be changed by the bank at its discretion
at any time. The Canadian Credit Facility has a three-year term and 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. At November 8, 1996, the outstanding balance under
this facility was $46,500,000 CDN. The Company has also used this facility for
two letters of credit in the amount of $3,081,000 CDN.
SAXON CREDIT FACILITY. Saxon has a demand revolving credit facility with a
borrowing base of $22,000,000 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 November 8, 1996 there was no outstanding balance under
this facility.
OTHER FINANCING
VOLUMETRIC PRODUCTION PAYMENTS. Under the terms of volumetric production
payments covering certain U.S. properties, the Company is required to deliver
the scheduled volumes from the subject properties or to make a cash payment for
volumes produced but not delivered, in combination not to exceed a specified
percentage of monthly production. If production levels are not sufficient to
meet scheduled delivery commitments, the Company must account for and make up
such shortages, at market-based prices, from future production. Amounts
received for volumetric production payments are recorded as deferred revenue,
which is amortized as sales are recorded based upon the scheduled deliveries
under the production payment agreements. As of September 30, 1996, the volumes
remaining to be delivered were approximately 4.9 BCF of natural gas, and the
related deferred revenue was $8,569,000.
PRODUCTION PAYMENT. Under the terms of a production payment obligation,
the Company must make a monthly cash payment based on net proceeds from subject
properties located in the U.S. This obligation has been recorded at a discount
to reflect a market rate of interest. At September 30, 1996 the remaining
principal amount was $17,974,000 and the recorded liability was $13,783,000.
Properties to which approximately 4% of the Company's estimated total proved
reserves are attributable, on an MCFE basis, are dedicated to this production
payment financing.
DIVIDENDS
On February 1, 1996, a stock dividend of .013605 shares of Common Stock on
each share of its outstanding $.75 Convertible Preferred Stock was paid to
holders of record on January 10, 1996. On May 1, 1996 a stock dividend of
0.017863 shares of Common Stock on each share of its outstanding $.75
Convertible Preferred
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Stock was paid to holders of record on April 10, 1996. On August 1, 1996 a
cash dividend of $.1875 on each share of its outstanding $.75 Convertible
Preferred Stock was paid to holders of record on July 10, 1996. On November
1, 1996, a cash dividend of $.1875 on each share of its outstanding $.75
Convertible Preferred Stock was paid to shareholders of record on October 10,
1996. The Indenture executed in connection with the 11 1/4% Senior
Subordinated Notes due 2003 and the Credit Facility contain restrictive
provisions governing dividend payments.
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 1996 to approximately 3 BCF from approximately 5 BCF at December
31, 1995. At September 30, 1996 the undiscounted value of this imbalance is
approximately $5,580,000, of which $2,240,000 is reflected on the balance
sheet as a short-term liability and the remaining $3,340,000 is reflected on
the balance sheet as a long-term liability. In the absence of a gas
balancing agreement, the Company is unable to determine when its partners may
choose to 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.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
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
The following report on Form 8-K was filed by Forest during the third
quarter of 1996:
Date of Report Item Reported Financial Statements Filed
-------------- ------------- --------------------------
August 7, 1996 Item 7 None
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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: January 28, 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)
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