<PAGE>
- -------------------------------------------------------------------------------
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, 1998
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 1-13515
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, 1998
- ------------------------------- ----------------
Common Stock, Par Value $.10 Per Share 44,646,542
- ----------------------------------------------------------------------------
<PAGE>
PART I. FINANCIAL INFORMATION
FOREST OIL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
(In Thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,783 18,191
Accounts receivable 54,274 65,720
Other current assets 6,493 4,649
--------- ---------
Total current assets 65,550 88,560
Net property and equipment, at cost 718,426 521,293
Goodwill and other intangible assets, net 23,124 26,243
Other assets 11,976 11,686
--------- ---------
$ 819,076 647,782
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 48,724 59,719
Accrued interest 2,993 4,152
Other current liabilities 2,028 2,627
--------- ---------
Total current liabilities 53,745 66,498
Long-term debt 510,294 254,760
Other liabilities 15,250 17,020
Deferred income taxes 16,001 34,767
Minority interest - 12,910
Shareholders' equity:
Common stock 4,464 3,632
Capital surplus 589,613 488,908
Accumulated deficit (360,763) (223,460)
Accumulated other comprehensive loss (9,433) (7,253)
Treasury stock, at cost (95) -
--------- ---------
Total shareholders' equity 223,786 261,827
--------- ---------
$ 819,076 647,782
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-1-
<PAGE>
FOREST OIL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF PRODUCTION AND OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1998 1997 1998 1997
---------- --------- ---------- ---------
(In Thousands Except Production and Per Share Amounts)
<S> <C> <C> <C> <C>
PRODUCTION
Natural gas (mmcf) 16,389 13,116 44,351 36,149
--------- -------- --------- --------
--------- -------- --------- --------
Oil, condensate and natural gas
liquids (thousands of barrels) 1,103 882 3,104 2,373
--------- -------- --------- --------
--------- -------- --------- --------
STATEMENTS OF CONSOLIDATED OPERATIONS
Revenue:
Marketing and processing $ 35,906 42,261 104,748 140,470
Oil and gas sales:
Gas 30,278 25,496 86,785 71,196
Oil, condensate and natural gas liquids 11,831 14,220 37,151 41,029
--------- -------- --------- --------
Total oil and gas sales 42,109 39,716 123,936 112,225
--------- -------- --------- --------
Total revenue 78,015 81,977 228,684 252,695
Expenses:
Marketing and processing 34,238 40,362 99,502 134,268
Oil and gas production 11,793 8,912 29,997 27,583
General and administrative 6,015 3,901 15,192 12,448
Depreciation and depletion 26,968 22,064 74,163 58,820
Impairment of oil and gas properties 140,000 - 140,000 -
--------- -------- --------- --------
Total operating expenses 219,014 75,239 358,854 233,119
--------- -------- --------- --------
Earnings (loss) from operations (140,999) 6,738 (130,170) 19,576
Other income and expense:
Other income, net (1,297) (232) (7,951) (1,882)
Interest expense 10,168 5,619 28,429 15,652
Minority interest in earnings (loss)
of subsidiary (389) 48 (517) 209
Translation loss on subordinated debt 5,166 - 8,328 -
--------- -------- --------- --------
Total other income and expense 13,648 5,435 28,289 13,979
--------- -------- --------- --------
Earnings (loss) before income taxes and
extraordinary items (154,647) 1,303 (158,459) 5,597
Income tax expense (benefit):
Current 550 86 1,499 1,359
Deferred (17,105) 634 (16,459) 2,329
--------- -------- --------- --------
(16,555) 720 (14,960) 3,688
--------- -------- --------- --------
Earnings (loss) before extraordinary item (138,092) 583 (143,499) 1,909
Extraordinary item - gain (loss) on
extinguishment of debt - (12,359) 6,196 (12,359)
--------- -------- --------- --------
Net loss $(138,092) (11,776) (137,303) (10,450)
--------- -------- --------- --------
--------- -------- --------- --------
Net loss attributable to common stock $(138,092) (11,776) (137,303) (10,639)
--------- -------- --------- --------
--------- -------- --------- --------
Weighted average number of common shares
outstanding 44,176 33,970 39,651 32,776
--------- -------- --------- --------
--------- -------- --------- --------
</TABLE>
continued on next page
See accompanying notes to condensed consolidated financial statements.
-2-
<PAGE>
FOREST OIL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF PRODUCTION AND OPERATIONS
(UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ---------------------
1998 1997 1998 1997
-------- ------- ------ ------
(In Thousands Except Production and Per Share Amounts)
<S> <C> <C> <C> <C>
Basic earnings (loss) per common share:
Earnings (loss) attributable to common stock
before extraordinary item $ (3.13) .02 (3.62) .05
Extraordinary item - gain (loss) on
extinguishment of debt -- (.37) .16 (.37)
-------- ----- ------ -----
Net loss attributable to common stock $ (3.13) (.35) (3.46) (.32)
-------- ----- ------ -----
-------- ----- ------ -----
Diluted earnings (loss) per common share:
Earnings (loss) attributable to common
stock before extraordinary item $ (3.13) .02 (3.62) .05
Extraordinary item - gain (loss) on
extinguishment of debt -- (.36) .16 (.36)
-------- ----- ------ -----
Net loss attributable to common stock $ (3.13) (.34) (3.46) (.31)
-------- ----- ------ -----
-------- ----- ------ -----
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-3-
<PAGE>
FOREST OIL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1998 1997
------------- -------------
(In Thousands)
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) before preferred dividend and extraordinary item $ (143,499) 1,909
Adjustments to reconcile net earnings (loss) to net cash provided by
operating activities:
Depreciation and depletion 74,163 58,820
Impairment of oil and gas properties 140,000 -
Translation loss on subordinated debt 8,328 -
Amortization of deferred debt costs 664 503
Deferred income tax expense (benefit) (16,459) 2,329
Minority interest in earnings (loss) of subsidiary (517) 209
Other, net 392 403
Decrease in accounts receivable 9,853 5,751
Increase in other current assets (2,540) (1,728)
Decrease in accounts payable (10,001) (11,778)
Decrease in accrued interest and other current liabilities (1,221) (13,019)
Settlement of volumetric production payment obligation - (6,832)
Amortization of deferred revenue - (1,524)
---------- ----------
Net cash provided by operating activities 59,163 35,043
Cash flows from investing activities:
Capital expenditures for property and equipment (443,496) (114,834)
Less stock issued for acquisitions 97,376 -
---------- ----------
(346,120) (114,834)
Proceeds from sales of assets 8,584 7,485
Investment in subsidiaries - (3,334)
Increase in other assets, net (627) (811)
---------- ----------
Net cash used by investing activities (338,163) (111,494)
Cash flows from financing activities:
Proceeds from bank borrowings 431,331 259,084
Repayments of bank borrowings (238,834) (217,715)
Repayments of production payment obligation (58) (1,991)
Issuance of 8 3/4% senior subordinated notes, net of issuance costs 74,616 121,854
Redemption of 11 1/4% senior subordinated notes - (99,195)
Proceeds from the exercise of options and warrants - 32,287
Treasury shares sold by subsidiary - 2,817
Costs of preferred stock conversion - (800)
Payment of preferred stock dividends - (540)
Decrease in other liabilities, net (1,319) (3,414)
---------- ----------
Net cash provided by financing activities 265,736 92,387
Effect of exchange rate changes on cash (144) 331
---------- ----------
Net decrease in cash and cash equivalents (13,408) 16,267
Cash and cash equivalents at beginning of period 18,191 8,626
---------- ----------
Cash and cash equivalents at end of period $ 4,783 24,893
---------- ----------
---------- ----------
Cash paid during the period for:
Interest $ 32,035 19,022
Income taxes $ 1,278 4,282
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-4-
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(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, 1998
and the results of operations for the three and nine month periods ended
September 30, 1998 and 1997. 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,
1997, previously filed with the Securities and Exchange Commission.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, Reporting Comprehensive Income
(Statement No. 130), effective for years beginning after December 15, 1997.
Statement No. 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. The Company adopted Statement No. 130 effective January 1,
1998 and, accordingly, has reported accumulated other comprehensive loss as a
separate line item in the shareholders' equity section of its condensed
consolidated balance sheets at September 30, 1998 and December 31, 1997. The
components of total comprehensive income (loss) for the periods consist of net
earnings, foreign currency translation and changes in the unfunded pension
liability and are as follows:
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1998 1997 1998 1997
---------- -------- --------- --------
(In Thousands)
<S> <C> <C> <C> <C>
Net loss $(138,092) (11,776) (137,303) (10,450)
Other comprehensive
net earnings (loss) (1,177) 175 (2,180) (1,594)
--------- -------- --------- --------
Total comprehensive net
loss $(139,269) (11,601) (139,483) (12,044)
--------- -------- --------- --------
--------- -------- --------- --------
</TABLE>
(2) ACQUISITIONS
On February 3, 1998 the Company purchased 13 oil and gas properties
located onshore Louisiana (the Louisiana Acquisition) for total consideration of
approximately $230,776,000. The consideration consisted of 1,000,000 shares of
the Company's Common Stock valued at $14,219,000 and approximately $216,557,000
in cash, funded primarily from the Company's bank credit facility and the
issuance of $75,000,000 principal amount of 8 3/4% subordinated notes (see Note
6). Estimated proved reserves acquired in the Louisiana Acquisition were
approximately 189 BCFE.
-5-
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
(2) ACQUISITIONS, CONTINUED
On June 25 and 29, 1998, in two separate closings, the Company
purchased certain oil and gas properties from The Anschutz Corporation
(Anschutz) (the Anschutz Acquisition). Total consideration consisted of
5,950,000 shares of the Company's Common Stock valued at $67,565,000. The
value of the stock was determined by reference to the quoted market price
during the period two days preceding and two days following the announcement
of the agreement in principle, less a discount to reflect the size of the
block of shares to be issued and estimated brokerage fees on ultimate
disposition of the shares. The properties include an interest in The Anschutz
Ranch field which is located in Utah and Wyoming, prospects and producing
acreage in Canada, and interests in projects in various other countries.
There were approximately 80 BCFE of estimated proved reserves associated with
the Anschutz Acquisition.
(3) SUBSIDIARIES
SAXON PETROLEUM INC. 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.
Since Forest had majority voting control over Saxon as a result of the voting
common shares owned and proxies held, it accounted for Saxon as a consolidated
subsidiary from the date of its acquisition. During 1997 Forest converted
preferred shares of Saxon into common shares and acquired additional common
shares of Saxon pursuant to an equity participation agreement. These
transactions increased Forest's ownership in Saxon to a 65% economic (49%
voting) interest.
On June 25, 1998 Forest announced that it agreed to acquire all of the
approximately 49.8 million outstanding common shares of Saxon not previously
owned by Forest in exchange for Forest Common Stock on the basis of one share of
Forest Common Stock for each 47 common shares of Saxon. The transaction was
approved by the minority shareholders of Saxon on August 7, 1998 and by the
Alberta Court of Queen's Bench on August 10, 1998. As a result of this
acquisition, common shares outstanding increased by 1,081,256 shares and the
minority interest was eliminated.
CANADIAN FOREST OIL LTD. On January 31, 1996 the Company acquired ATCOR
Resources Ltd. of Calgary, Alberta. 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).
Canadian Forest is the issuer of the 8 3/4% Senior Subordinated Notes
(the 8 3/4% Notes) (see Note 6). The Company has not presented separate
financial statements and other disclosures concerning Canadian Forest because
management has determined that such information is not material to holders of
the 8 3/4% Notes; however, the following summarized consolidated financial
information is being provided for Canadian Forest as of September 30, 1998 and
December 31, 1997 and for the nine months ended September 30, 1998 and 1997:
-6-
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
(3) SUBSIDIARIES, CONTINUED
<TABLE>
<CAPTION>
September 30, December 31,
CANADIAN FOREST OIL LTD. 1998 1997
------------- ------------
(In Thousands)
<S> <C> <C>
Summarized Consolidated Balance Sheet Information:
ASSETS
Current assets $ 20,852 35,630
Note receivable from parent 75,060 -
Property and equipment, net 95,132 117,394
Goodwill and other intangible assets, net 23,124 26,243
Other assets 3,451 3,320
--------- ---------
$ 217,619 182,587
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIT)
Current liabilities $ 17,211 24,029
Credit facility 12,077 -
8 3/4% Senior Subordinated Notes 199,975 124,690
Other liabilities 339 396
Deferred income taxes 21,573 36,282
Shareholder's equity (deficit) (33,556) (2,810)
--------- ---------
$ 217,619 182,587
--------- ---------
--------- ---------
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1998 1997
--------- ---------
(In Thousands)
<S> <C> <C>
Summarized Consolidated Statements of Operations:
Revenue $ 118,790 169,412
--------- ---------
--------- ---------
Earnings (loss) before income taxes $ (42,058) 5,792
--------- ---------
--------- ---------
Net earnings (loss) $ (31,051) 1,791
--------- ---------
--------- ---------
</TABLE>
(4) NET PROPERTY AND EQUIPMENT
Components of net property and equipment are as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
----------- ----------
(In Thousands)
<S> <C> <C>
Oil and gas properties $ 1,999,814 1,594,443
Buildings, transportation and
other equipment 11,928 11,157
----------- ----------
2,011,742 1,605,600
Less accumulated depreciation,
depletion and valuation allowance (1,293,316) (1,084,307)
----------- ----------
$ 718,426 521,293
----------- ----------
----------- ----------
</TABLE>
In the third quarter of 1998, the Company recorded a charge for
impairment of oil and gas properties of $125,000,000, net of related deferred
taxes ($140,000,000 pre-tax) pursuant to the ceiling test limitation
prescribed by the Securities and Exchange Commission for companies using the
full cost method of accounting. Approximately $102,000,000 of the charge was
recorded in the United States, substantially all of which is attributable to
commodity price declines during the quarter. There were no income tax effects
of the writedown taken in the United States. The remaining $23,000,000
(approximately $38,000,000 pre-tax) of the writedown was attributable to the
Company's Canadian properties where the effects of modest price increases
were more than offset by the impacts of delayed capital spending and
production and the Company's acquisition of the minority interest of Saxon
Petroleum Inc. in August 1998.
-7-
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
(5) GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets recorded in the acquisition of
ProMark consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
(In Thousands)
<S> <C> <C>
Goodwill $ 14,966 16,029
Gas marketing contracts 13,056 13,986
-------- ------
28,022 30,015
Less accumulated amortization (4,898) (3,772)
-------- ------
$ 23,124 26,243
-------- ------
-------- ------
</TABLE>
Goodwill is being amortized on a straight line basis over 20 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 12
years.
(6) LONG-TERM DEBT
Components of long-term debt are as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
(In Thousands)
<S> <C> <C>
U.S. Credit Facility $ 264,700 85,550
Canadian Credit Facility 12,077 -
Saxon Credit Facility 24,866 25,840
Production payment obligation - 10,004
11 1/4% Senior Subordinated Notes 8,676 8,676
8 3/4% Senior Subordinated Notes 199,975 124,690
---------- -------
$ 510,294 254,760
---------- -------
---------- -------
</TABLE>
-8-
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
(6) LONG-TERM DEBT, CONTINUED
On September 29, 1997 Canadian Forest completed an offering of
$125,000,000 of 8 3/4% Notes which were sold at 99.745% and which are guaranteed
on a senior subordinated basis by the Company. A portion of the proceeds was
used to fund a tender offer pursuant to which $90,233,000 aggregate principal
amount of 11 1/4% Senior Subordinated Notes (the 11 1/4% Notes) was tendered by
the holders. A portion of the proceeds was used to repay the outstanding balance
under the Canadian Credit Facility and the remainder was used for working
capital and to fund capital expenditures. The remaining outstanding principal
amount of 11 1/4% Notes is callable on or after September 1, 1998 at 105.688% of
the principal amount.
On February 2, 1998 Canadian Forest issued $75,000,000 principal
amount of 8 3/4% subordinated notes, which were sold at 100.375%. Net
proceeds were used to provide funds for the Louisiana Acquisition. The notes
issued in 1998 were subsequently exchanged for notes of the same series of 8
3/4% Notes that were issued in September 1997.
The Company is required to recognize foreign currency translation
gains or losses related to its 8 3/4% Notes because the debt is denominated
in U.S. dollars and the functional currency of Canadian Forest is the
Canadian dollar. As a result of the decrease in the value of the Canadian
dollar relative to the U.S. dollar during the first nine months of 1998, the
Company reported a noncash translation loss of approximately $8,328,000.
On June 5, 1998 the Company settled its remaining nonrecourse
production payment obligation for 271,214 shares of the Company's Common Stock.
The stock was valued at $3,750,000 based upon the weighted average trading price
for the 10 day trading period preceding the closing date. The obligation, which
originated in May 1992, had a remaining book value of approximately $9,966,000.
As a result of this settlement, the Company recorded an extraordinary gain on
extinguishment of debt of $6,196,000 (net of related expenses) in the second
quarter of 1998.
(7) EARNINGS (LOSS) PER SHARE
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings per Share
(Statement No. 128) effective for periods ending after December 15, 1997.
Statement No. 128 changed the computation, presentation and disclosure
requirements for earnings per share for entities with publicly held common stock
or potential common stock. Under such requirements the Company is required to
present both basic earnings per share and diluted earnings per share. Basic
earnings (loss) per share is computed by dividing net earnings (loss)
attributable to common stock by the weighted average number of common shares
outstanding during each period, excluding treasury shares.
Diluted earnings (loss) per share is computed by adjusting the average
number of common shares outstanding for the dilutive effect, if any, of
convertible preferred stock, stock options and warrants. The effect of
potentially dilutive securities is based on earnings (loss) before extraordinary
items.
The Company adopted the provisions of Statement No. 128 as of December
31, 1997. As prescribed by Statement No. 128, the Company has restated prior
periods' earnings per share of common stock, including interim earnings per
share of common stock.
-9-
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
(7) EARNINGS (LOSS) PER SHARE, CONTINUED
The following sets forth the calculation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- --------------------
1998(1) 1997(2) 1998(1) 1997(3)
--------- -------- -------- --------
(In Thousands Except Per Share Amounts)
<S> <C> <C> <C> <C>
Basic loss per share:
Net loss $(138,092) (11,776) (137,303) (10,450)
Less: Preferred stock dividends - - - (189)
--------- ------- -------- -------
Net loss available to common stockholders $(138,092) (11,776) (137,303) (10,639)
--------- ------- -------- -------
--------- ------- -------- -------
Weighted average common shares outstanding 44,176 33,970 39,651 32,776
--------- ------- -------- -------
--------- ------- -------- -------
Basic loss per share $ (3.13) (.35) (3.46) (.32)
--------- ------- -------- -------
--------- ------- -------- -------
Diluted loss per share:
Weighted average common shares outstanding 44,176 33,970 39,651 32,776
Add dilutive effects of:
$.75 convertible preferred stock - - - 435
Employee options - 218 - 191
Anschutz warrants - 326 - 914
--------- ------- -------- -------
Weighted average common shares outstanding
including the effects of dilutive securities 44,176 34,514 39,651 34,316
--------- ------- -------- -------
--------- ------- -------- -------
Diluted loss per share $ (3.13) (.34) (3.46) (.31)
--------- ------- -------- -------
--------- ------- -------- -------
</TABLE>
(1) At September 30, 1998, options to purchase 1,886,260 shares of common stock
at prices ranging from $9.31 to $25.00 per share were outstanding, but were
not included in the computation of diluted loss per share for the three
and nine month periods ended September 30, 1998 because the effect of
the assumed exercise of these stock options as of the beginning of the
period was antidilutive. These options expire at various dates from 2000
through 2008.
(2) At September 30, 1997, options to purchase 68,000 shares of common stock at
prices ranging from $16.50 to $25.00 per share were outstanding, but were
not included in the computation of diluted earnings per share for the
quarter ended September 30, 1997 because the exercise prices were greater
than the average market price of the common shares. These options expire at
various dates from 2002 through 2007.
(3) At September 30, 1997, options to purchase 130,000 shares of common stock
at prices ranging from $15.00 to $25.00 per share were outstanding, but
were not included in the computation of diluted earnings per share in
the nine months ended September 30, 1997 because the exercise prices were
greater than the average market price of the common shares. These options
expire at various dates from 2000 to 2007.
-10-
<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 1998 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 1997 Annual Report on Form 10-K.
RESULTS OF OPERATIONS FOR THE THIRD QUARTER OF 1998
The net loss for the third quarter of 1998 was $138,092,000 or $3.13
per basic and diluted common share compared to a net loss of $11,776,000 or $.35
per basic common share and $.34 per diluted common share in the corresponding
period of 1997. The 1998 period included a noncash charge for impairment of oil
and gas properties of $125,000,000, net of related deferred taxes ($140,000,000
pre-tax), as well as a noncash loss on currency translation of $5,166,000
related to subordinated debt issued by Forest's Canadian subsidiary. The 1997
period included an extraordinary loss on extinguishment of debt of $12,359,000.
Exclusive of these items, the Company's net loss would have been $7,926,000 for
the third quarter of 1998 compared to net income of $583,000 in the
corresponding 1997 period.
The 1998 writedown of oil and gas properties was required pursuant
to the ceiling test limitation prescribed by the Securities and Exchange
Commission for companies using the full cost method of accounting.
Approximately $102,000,000 of the charge was recorded in the United States,
substantially all of which is attributable to commodity price declines during
the quarter. There were no income tax effects of the writedown taken in the
United States. The remaining $23,000,000 (approximately $38,000,000 pre-tax)
of the writedown was attributable to the Company's Canadian properties where
the effects of modest price increases were more than offset by the impacts of
delayed capital spending and production and the effects of the Company's
acquisition of the minority interest of Saxon Petroleum Inc. in August 1998.
The Company's marketing and processing revenue and the related
marketing and processing expense both decreased by 15% in the third quarter
of 1998 compared to the third quarter of 1997 due to decreased day trading
operations in Canada. The gross margin reported for marketing and processing
activities decreased slightly to $1,668,000 in the third quarter of 1998 from
$1,899,000 in the third quarter of 1997.
The Company's oil and gas sales revenue increased by 6% to
$42,109,000 in the third quarter of 1998 from $39,716,000 in the third
quarter of 1997. Revenue from increased production volumes was partially
offset by lower prices received for both oil and natural gas. Production
volumes for natural gas and liquids (consisting of oil, condensate and
natural gas liquids) in the third quarter of 1998 increased 25% from the
comparable 1997 period. The increases in production are primarily due to
discoveries in the Gulf of Mexico being brought onto production and
production attributable to properties purchased in the Louisiana Acquisition
and the Anschutz Acquisition. Production volumes in the third quarter of 1998
were negatively impacted by storms in the Gulf of Mexico which curtailed
existing production and delayed bringing new production onstream. Management
estimates the impact to be approximately 1.5 to 2.0 BCFE for the quarter. The
average sales price received for natural gas in the third quarter of 1998
decreased 5% compared to the average sales price received in the
corresponding 1997 period. The average sales price received by the Company
for its liquids production during the third quarter of 1998 decreased 33%
compared to the average sales price received during the comparable 1997
period.
-11-
<PAGE>
Oil and gas production expense of $11,793,000 in the third quarter of
1998 increased 32% from $8,912,000 in the comparable period of 1997 primarily as
a result of higher production levels. 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 increased approximately 6% in
the third quarter of 1998 to $.51 per MCFE from $.48 MCFE in the third quarter
of 1997. The increase in the per-unit rate is due primarily to increased
maintenance and expensed workover activity in the third quarter of 1998.
The following tables set forth production volumes, average sales prices
and production expenses during the periods as follows:
<TABLE>
<CAPTION>
Three Months Ended September 30, 1998
---------------------------------------------------------------
Offshore Onshore
Gulf of Gulf Total Total
Mexico Coast Western U.S. Canada Company
------- -------- -------- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
NATURAL GAS
Production (MMCF) 5,944 3,497 3,050 12,491 3,898 16,389
Sales price received (per MCF) $ 2.04 2.07 1.73 1.98 1.03 1.75
Effects of energy swaps (per MCF) (1) .12 .27 (.01) .13 (.01) .10
------- ------- ------- ------- ------- -------
Average sales price (per MCF) $ 2.16 2.34 1.72 2.11 1.02 1.85
LIQUIDS
Oil and condensate:
Production (MBBLS) 191 206 85 482 328 810
Sales price received (per BBL) $ 10.64 12.50 11.65 11.61 11.54 11.58
Effects of energy swaps (per BBL)(1) 1.19 - - .47 .80 .61
------- ------- ------- ------- ------- -------
Average sales price (per BBL) $ 11.83 12.50 11.65 12.08 12.34 12.19
Natural gas liquids:
Production (MBBLS) 1 27 144 172 121 293
Average sales price (per BBL) $ 12.00 9.93 5.94 6.60 6.79 6.68
Total liquids production (MBBLS) 192 233 229 654 449 1,103
Average liquids sales price (per BBL) $ 11.83 12.20 8.06 10.64 10.85 10.73
TOTAL PRODUCTION:
Production volumes (MMCFE) 7,096 4,895 4,424 16,415 6,592 23,007
Average sales price (per MCFE) $ 2.13 2.25 1.60 2.02 1.34 1.83
Operating expense (per MCFE) .40 .76 .42 .51 .51 .51
------- ------- ------- ------- ------- -------
Netback (per MCFE) $ 1.73 1.49 1.18 1.51 .83 1.32
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
</TABLE>
(1) Energy swaps were entered into to hedge the price of spot market
volumes against price fluctuations. Hedged natural gas volumes were
7,150 MMCF in the three months ended September 30, 1998. Hedged oil and
condensate volumes were 49,000 barrels in the three months ended
September 30, 1998. The aggregate net gain under energy swap agreements
was $2,062,000 for the period and was accounted for as an increase to
oil and gas sales.
-12-
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended September 30, 1997
-----------------------------------------------------------------
Offshore Onshore
Gulf of Gulf Total Total
Mexico Coast Western U.S. Canada Company
-------- ------- ------- ----- ------ -------
<S> <C> <C> <C> <C> <C> <C>
NATURAL GAS
Production (MMCF) 7,464 1,174 689 9,327 3,789 13,116
Sales price received (per MCF) $ 2.36 2.15 2.07 2.32 1.22 1.99
Effects of energy swaps (per MCF)(1) (.10) - - (.08) .01 (.05)
------- ----- ----- ------ ------ ------
Average sales price (per MCF) $ 2.26 2.15 2.07 2.24 1.23 1.94
LIQUIDS
Oil and condensate:
Production (MBBLS) 278 20 30 328 383 711
Sales price received (per BBL) $ 17.02 17.35 18.27 17.16 17.67 17.44
Effects of energy swaps (per BBL)(1) .14 - - .11 .18 .14
------- ----- ----- ------ ------ ------
Average sales price (per BBL) $ 17.16 17.35 18.27 17.27 17.85 17.58
Natural gas liquids:
Production (MBBLS) - 38 3 41 130 171
Average sales price (per BBL) $ - 9.26 7.67 9.12 10.35 10.05
Total liquids production (MBBLS) 278 58 33 369 513 882
Average liquids sales price (per BBL) $ 17.15 12.05 17.30 16.37 15.95 16.12
TOTAL PRODUCTION
Production volumes (MMCFE) 9,132 1,522 887 11,541 6,867 18,408
Average sales price (per MCFE) $ 2.37 2.11 2.25 2.33 1.87 2.16
Operating expense (per MCFE) .37 .57 .98 .44 .55 .48
------- ----- ----- ------ ------ ------
Netback (per MCFE) $ 2.00 1.54 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. The aggregate net losses under energy swap
agreements were $612,000 for the period and were accounted for as a
reduction to oil and gas sales.
General and administrative expense increased to $6,015,000 in the
third quarter of 1998 compared to $3,091,000 in the comparable period of
1997. Total overhead costs (capitalized and expensed general and
administrative costs) of $8,264,000 in the third quarter of 1998 increased
compared to $5,702,000 in the comparable period of 1997. The increase is due
to a one-time charge of approximately $1,500,000 of severance and transition
costs associated with the Company's acquisition of a minority interest in
Saxon Petroleum, Inc. and higher headcount and employee related costs as a
result of property acquisitions in 1998.
-13-
<PAGE>
Depreciation and depletion expense increased 22% to $26,968,000 in
the third quarter of 1998 from $22,064,000 in the third quarter of 1997 due
to increased production. On a per-unit basis, depletion expense was
approximately $1.14 per MCFE in the third quarter of 1998 compared to $1.16
per MCFE in the corresponding 1997 period. On a pro forma basis giving effect
to the writedown, the Company's depletion rate for the third quarter of 1998
would have been approximately $1.00 per MCFE.
Other income was $1,297,000 in the third quarter of 1998 compared to
$232,000 in the third quarter of 1997. The 1998 period includes $1,400,000 of
death benefits received under a life insurance policy covering a former
executive officer of the Company.
Interest expense increased 81% to $10,168,000 in the third quarter
of 1998 compared to $5,619,000 in the corresponding 1997 period. The effect
of lower interest rates in the 1998 period was more than offset by an
increase in the amount of outstanding debt during 1998. The Company's
aggregate outstanding principal amount of debt averaged approximately
$500,000,000 in the third quarter of 1998 compared to approximately
$235,000,000 in the third quarter of 1997. The interest rate on the Company's
debt decreased to an average of 8.1% in the third quarter of 1998 from an
average of 9.6% in the third quarter of 1997.
Foreign currency translation loss of $5,166,000 in the third quarter
of 1998 relates to translation of the 8 3/4% Notes issued by Canadian Forest,
and is attributable to the decrease in the value of the Canadian dollar
relative to the U.S. dollar during the period. During the quarter, the value
of the Canadian dollar relative to $1.00 U.S. decreased to $.6528 at
September 30, 1998 from $.6813 at June 30, 1998. The Company is required to
recognize the noncash foreign currency translation gains or losses related to
the 8 3/4% Notes because the debt is denominated in U.S. dollars and the
functional currency of Canadian Forest is the Canadian dollar.
The extraordinary loss on the extinguishment of debt of $12,359,000
in the third quarter of 1997 relates to the tender offer for the Company's
11 1/4% Notes.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
For the first nine months of 1998, Forest reported a net loss of
$137,303,000 or $3.46 per basic and diluted common share compared to a net
loss of $10,450,000 or $.32 per basic common share and $.31 per diluted
common share in the corresponding period of 1997. The 1998 period included a
noncash charge for impairment of oil and gas properties of $125,000,000, net
of related deferred taxes ($140,000,000 pre-tax), an extraordinary gain on
extinguishment of debt of $6,196,000 as well as a noncash loss on currency
translation of $8,328,000 related to subordinated debt issued by Forest's
Canadian subsidiary. The 1997 period included an extraordinary loss on
extinguishment of debt of $12,359,000. Exclusive of these items, the
Company's net loss would have been $10,171,000 for the first nine months of
1998 compared to net income of $1,909,000 for the corresponding 1997 period.
The 1998 writedown of oil and gas properties was required pursuant
to the ceiling test limitation prescribed by the Securities and Exchange
Commission for companies using the full cost method of accounting.
Approximately $102,000,000 of the charge was recorded in the United States,
substantially all of which is attributable to commodity price declines during
the quarter. There were no income tax effects of the writedown taken in the
United States. The remaining $23,000,000 (approximately $38,000,000 pre-tax)
of the writedown was attributable to the Company's Canadian properties where
the effects of modest price increases were more than offset by the impacts of
delayed capital spending and production and the effects of the Company's
acquisition of the minority interest of Saxon Petroleum Inc. in August 1998.
The Company's marketing and processing revenue and the related
marketing and processing expense both decreased by 26% in the 1998 period
compared to the previous year due to decreased day trading operations in
Canada. The gross margin reported for marketing and processing activities of
$5,246,000 in the first nine months of 1998 was 15% lower than the gross
margin of $6,202,000 in the first nine months of 1997.
The Company's oil and gas sales revenue increased by 10% to
$123,936,000 in the first nine months of 1998 compared to $112,225,000 in the
first nine months of 1997. Revenue from increased production volumes was
partially offset by lower prices received for both oil and natural gas.
Production volumes for natural gas and liquids in the first nine months of
1998 increased 23% and 31%, respectively, from the comparable 1997 period.
The increases in production are due primarily to discoveries in the Gulf of
Mexico being brought onto production and production attributable to
properties purchased in the Louisiana Acquisition and the Anschutz
Acquisition. The average sales price received for
-14-
<PAGE>
natural gas in the first nine months of 1998 decreased 1% compared to the
average sales price received in the corresponding 1997 period. The average
sales price received for liquids during the first nine months of 1998
decreased 31% compared to the average sales price received during the
comparable 1997 period.
Oil and gas production expense of $29,997,000 in the first nine
months of 1998 increased 9% from $27,583,000 in the comparable period of
1997. The 1998 period includes additional production expense related to
properties acquired in the Louisiana Acquisition and the Anschutz Acquisition.
On an MCFE basis, production expense decreased approximately 13% in the first
nine months of 1998 to $.48 per MCFE from $.55 per MCFE in the first nine
months of 1997. The decrease in the per-unit rate is due primarily to lower
per-unit costs related to 1998 property acquisitions as well as fixed
offshore costs being spread over a larger production base.
The following tables set forth production volumes, average sales
prices and production expenses during the periods as follows:
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1998
-----------------------------------------------------------------
Offshore Onshore
Gulf of Gulf Total Total
Mexico Coast Western U.S. Canada Company
-------- ------- ------- ----- ------ -------
<S> <C> <C> <C> <C> <C> <C>
NATURAL GAS
Production (MMCF) 18,126 9,749 5,324 33,199 11,152 44,351
Sales price received (per MCF) $ 2.18 2.18 1.91 2.13 1.16 1.89
Effects of energy swaps (per MCF) (1) .09 .14 (.01) .09 - .07
-------- ----- ----- ------ ------ ------
Average sales price (per MCF) $ 2.27 2.32 1.90 2.22 1.16 1.96
LIQUIDS
Oil and condensate:
Production (MBBLS) 660 580 163 1,403 1,059 2,462
Sales price received (per BBL) $ 11.89 13.18 12.60 12.51 12.17 12.37
Effects of energy swaps (per BBL)(1) 1.05 - - .49 1.20 .79
-------- ----- ----- ------ ------ ------
Average sales price (per BBL) $ 12.94 13.18 12.60 13.00 13.37 13.16
Natural gas liquids:
Production (MBBLS) 1 99 200 300 342 642
Average sales price (per BBL) $ 12.00 8.59 6.27 7.05 7.73 7.41
Total liquids production (MBBLS) 661 679 363 1,703 1,401 3,104
Average liquids sales price (per BBL) $ 12.93 12.51 9.11 11.95 11.99 11.97
TOTAL PRODUCTION
Production volumes (MMCFE) 22,092 13,823 7,502 43,417 19,558 62,975
Average sales price (per MCFE) $ 2.25 2.26 1.79 2.17 1.53 1.97
Operating expense (per MCFE) .41 .59 .50 .48 .47 .48
-------- ----- ----- ------ ------ ------
Netback (per MCFE) $ 1.84 1.67 1.29 1.69 1.06 1.49
-------- ----- ----- ------ ------ ------
-------- ----- ----- ------ ------ ------
</TABLE>
(1) Energy swaps were entered into to hedge the price of spot market
volumes against price fluctuations. Hedged natural gas volumes were
18,949 MMCF in the nine months ended September 30, 1998. Hedged oil and
condensate volumes were 365,000 barrels in the nine months ended
September 30, 1998. The aggregate net gain under energy swap agreements
was $4,913,000 for the period and was accounted for as an increase to
oil and gas sales.
-15-
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1997
-----------------------------------------------------------------
Offshore Onshore
Gulf of Gulf Total Total
Mexico Coast Western U.S. Canada Company
-------- ------- ------- ----- ------ -------
<S> <C> <C> <C> <C> <C> <C>
NATURAL GAS
Production (MMCF) 19,659 3,735 2,023 25,417 10,732 36,149
Sales price received (per MCF) $ 2.42 2.12 2.15 2.35 1.43 2.08
Effects of energy swaps (per MCF)(1) (.20) - - (.15) (.01) (.11)
------- ----- ----- ------ ------ ------
Average sales price (per MCF) $ 2.22 2.12 2.15 2.20 1.42 1.97
LIQUIDS
Oil and condensate:
Production (MBBLS) 676 66 84 826 1,131 1,957
Sales price received (per BBL) $ 18.20 20.26 19.64 18.51 18.76 18.65
Effects of energy swaps (per BBL)(1) (.39) - - (.32) (.17) (.23)
------- ----- ----- ------ ------ ------
Average sales price (per BBL) $ 17.81 20.26 19.64 18.19 18.59 18.42
Natural gas liquids:
Production (MBBLS) - 87 7 94 322 416
Average sales price (per BBL) $ - 8.84 11.29 9.05 12.80 11.95
Total liquids production (MBBLS) 676 153 91 920 1,453 2,373
Average liquids sales price (per BBL) $ 17.81 13.76 19.00 17.26 17.31 17.29
TOTAL PRODUCTION
Production volumes (MMCFE) 23,715 4,653 2,569 30,937 19,450 50,387
Average sales price (per MCFE) $ 2.35 2.16 2.37 2.32 2.08 2.23
Operating expense (per MCFE) .43 .64 1.01 .51 .61 .55
------- ----- ----- ------ ------ ------
Netback (per MCFE) $ 1.92 1.52 1.36 1.81 1.47 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
10,319 MMCF in the nine months ended September 30, 1997. Hedged oil and
condensate volumes were 673,000 barrels in the nine months ended
September 30, 1997. The aggregate net losses under energy swap
agreements were $4,353,000 for the period and were accounted for as a
reduction to oil and gas sales.
-16-
<PAGE>
General and administrative expense was $15,192,000 in the first nine
months of 1998 compared to $12,448,000 in the comparable period of 1997.
Total overhead costs (capitalized and expensed general and administrative
costs) were $21,451,000 in the first nine months of 1998 compared to
$18,314,000 in the comparable period of 1997. The increase in total overhead
costs is attributable primarily to higher employee related costs in the 1998
period as a result of increased headcount and costs related to 1998 property
acquisitions, as well as approximately $1,500,000 of transition costs
associated with the Company's acquisition of a minority interest in Saxon
Petroleum, Inc., offset partially by lower insurance costs due to receipt of
a premium refund in the first quarter of 1998.
The following table summarizes the total overhead costs incurred
during the periods:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -------------------
1998 1997 1998 1997
------- ----- ------ ------
<S> <C> <C> <C> <C>
(In Thousands)
Overhead costs capitalized $ 2,249 1,801 6,259 5,866
General and administrative costs
expensed (1) 6,015 3,901 15,192 12,448
------- ----- ------ ------
Total overhead costs $ 8,264 5,702 21,451 18,314
------- ----- ------ ------
------- ----- ------ ------
</TABLE>
(1) Includes $670,000 and $690,000 related to marketing and processing
operations for the three month periods ended September 30, 1998 and
1997, respectively, and $2,111,000 and $2,152,000 for the nine month
periods ended September 30, 1998 and 1997, respectively.
Depreciation and depletion expense increased 26% to $74,163,000 in
the first nine months of 1998 from $58,820,000 in the first nine months of
1997 due primarily to increased production. On a per-unit basis, depletion
expense was approximately $1.14 per MCFE in the first nine months of 1998
compared to $1.12 per MCFE in the corresponding 1997 period. At September 30,
1998 the Company had undeveloped properties with a cost basis of
approximately $113,000,000 which were excluded from depletion, compared to
approximately $67,000,000 at September 30, 1997. The increase is attributable
primarily to undeveloped acreage acquired in the Louisiana Acquisition.
In the third quarter of 1998, the Company recorded a writedown of
its oil and gas properties pursuant to the ceiling test limitation prescribed
by the Securities and Exchange Commission for companies using the full cost
method of accounting. Additional 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.
Other income was $7,951,000 in the first nine months of 1998 and was
$1,882,000 in the first nine months of 1997. The 1998 period includes
$6,603,000 of income related to settlement of a Canadian gas purchase
contract and $1,400,000 of death benefits received under a life insurance
policy covering a former executive officer of the Company.
Interest expense increased 82% to $28,429,000 in the first nine
months of 1998 compared to $15,652,000 in the corresponding 1997 period. The
effect of lower interest rates in the 1998 period was more than offset by an
increase in the amount of outstanding debt during 1998. The Company's
aggregate outstanding principal amount of debt averaged approximately
$460,000,000 in the first nine months of 1998 compared to approximately
$210,000,000 in the first nine months of 1997. The interest rate on the
Company's debt decreased to an average of 8.24% in the first nine months of
1998 from 9.93% in the corresponding prior year period.
Foreign currency translation loss of $8,328,000 in the first nine
months of 1998 relates to translation of the 8 3/4% Notes issued by Canadian
Forest, and is attributable to the decrease in the value of the Canadian
dollar relative to the U.S. dollar during the period. The value of the
Canadian dollar was $.6528 per $1.00 U.S. at September 30, 1998 compared to
$.6992 at December 31, 1997. The Company is required to recognize the noncash
foreign currency translation gains or losses related to the 8 3/4% Notes
because the debt is denominated in U.S. dollars and the functional currency
of Canadian Forest is the Canadian dollar.
-17-
<PAGE>
The extraordinary gain on extinguishment of debt in the first nine
months of 1998 resulted from settlement of the Company's remaining
nonrecourse production payment obligation in exchange for 271,214 shares of
the Company's Common Stock valued at $3,750,000. The obligation had a
remaining book value of approximately $9,966,000. As a result of this
settlement, the Company recorded an extraordinary gain on extinguishment of
debt of $6,196,000 (net of related expenses). The extraordinary loss on the
extinguishment of debt in the first nine months of 1997 of $12,359,000
relates to the tender offer for the Company's 11 1/4% Notes.
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 1998, the Company has completed several transactions that
affected its financial position.
On February 2, 1998 Canadian Forest issued $75,000,000 principal
amount of 8 3/4% subordinated notes, the net proceeds of which were used to
provide funds for the Louisiana Acquisition described below. The notes issued
in 1998 were subsequently exchanged for notes of the same series of 8 3/4%
Notes that were issued in September 1997.
On February 3, 1998 the Company purchased 13 oil and gas properties
located onshore Louisiana for total consideration of approximately
$230,776,000. The consideration consisted of 1,000,000 shares of the
Company's Common Stock valued at $14,219,000 and approximately $216,557,000
in cash, funded primarily from the Company's bank credit facility and the
issuance of $75,000,000 principal amount of 8 3/4% Notes. Estimated proved
reserves acquired in the Louisiana Acquisition were approximately 186 BCFE.
On June 5, 1998 the Company settled its only remaining nonrecourse
production payment obligation in exchange for 271,214 shares of the Company's
Common Stock. The stock was valued at $3,750,000 based upon the weighted
average trading price for the 10 day trading period preceding the closing
date. The obligation, which originated in May 1992, had a remaining book
value of approximately $9,966,000. As a result of this settlement, the
Company recorded an extraordinary gain on extinguishment of debt of
$6,196,000 (net of related expenses) in the second quarter of 1998.
On June 25 and 29, 1998, in two separate closings, the Company
purchased certain oil and gas properties from Anschutz. Total consideration
consisted of 5,950,000 shares of the Company's Common Stock valued at
$67,565,000. The value of the stock was determined by reference to the quoted
market price during the period two days preceding and two days following the
announcement of the agreement in principle, less a discount to reflect the
size of the block of shares to be issued and estimated brokerage fees on
ultimate disposition of the shares. The properties include an interest in The
Anschutz Ranch Field which is located in Utah and Wyoming, prospects and
producing acreage in Canada, and interests in projects in various other
countries. There are approximately 80 BCFE of estimated proved reserves
associated with the Anschutz Acquisition.
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. At current production and
borrowing levels, the Company's sensitivity to price declines is significantly
increased compared to prior periods. No prediction can be made as to the
prices the Company will receive for its future oil and gas production. At
November 1, 1998 the Company had six offshore Gulf of Mexico wells whose
combined production represents approximately 27% 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.
-18-
<PAGE>
BANK CREDIT FACILITIES. At December 31, 1997 the Company and its
subsidiaries, Canadian Forest and ProMark, had a $250,000,000 global credit
facility (the Global Credit Facility) which provided for a global borrowing
base of $130,000,000 through a syndicate of banks led by The Chase Manhattan
Bank and The Chase Manhattan Bank of Canada. The borrowing base is subject to
semi-annual redeterminations. Under the Global Credit Facility, the Company
can allocate the global borrowing base between the United States and Canada,
subject to specified limitations. Funds borrowed under the Global Credit
Facility can be used for general corporate purposes. Under the terms of the
Global Credit Facility, the Company, Canadian Forest and ProMark 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.
The Global Credit Facility is secured by a lien on, and a security
interest in, a portion of the Company's U.S. proved oil and gas properties,
related assets, pledges of accounts receivable, and a pledge of 66% of the
capital stock of Canadian Forest. The Global Credit Facility is also
indirectly secured by substantially all of the assets of Canadian Forest.
On February 3, 1998, the Company amended the Global Credit Facility.
The primary purpose of the amendment was to increase the credit facility to
$300,000,000 and the borrowing base to $260,000,000 in order to finance the
Louisiana Acquisition. On June 29, 1998, the borrowing base was increased to
$300,000,000 after redetermination by the lenders. Under the amended Global
Credit Facility, the maximum credit facility allocations in the United States
and Canada are $275,000,000 and $25,000,000, respectively. The global
borrowing base is currently allocated $275,000,000 to the United States and
$25,000,000 to Canada.
At October 31, 1998, the outstanding borrowings under the Global
Credit Facility were $274,202,000. The Company has used the Global Credit
Facility for Letters of Credit in the amount of $233,000 in the United States
and $3,705,000 CDN in Canada.
In addition to the credit facilities described above, Saxon has a
credit facility with a borrowing base of $38,100,000 CDN. The borrowing base
is reduced by $600,000 CDN per quarter. The loan is subject to 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, 1998 the outstanding balance under
this facility was $37,610,000 CDN.
WORKING CAPITAL. The Company had a working capital surplus of
approximately $11,805,000 at September 30, 1998 compared to approximately
$22,062,000 at December 31, 1997. The decrease in the surplus is due
primarily to cash used in the first nine months of 1998 to fund capital
expenditures in the United States and Canada.
In the U.S., the Company periodically 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
capital has been net cash provided by operating activities. Net cash provided
by operating activities increased to $59,163,000 in the first nine months of
1998 compared to $35,043,000 in the first nine months of 1997. The 1998
period included higher production revenue and proceeds related to settlement
of a Canadian gas purchase contract, offset by higher interest costs. The
1997 period included a payment related to settlement of a volumetric
production payment obligation and cash used to reduce current liabilities
related to capital expenditures. The Company used $338,163,000 for investing
activities in the first nine months of 1998 compared to $111,494,000 in the
first nine months of 1997. The increase in cash used the 1998 period is due
primarily to the Louisiana Acquisition. Cash provided by financing activities
in the first nine months of 1998 was $265,736,000 compared to $92,387,000 in
1997. The 1998 period included approximately $75,000,000 of proceeds from the
issuance of the 8 3/4% Notes as well as net drawdowns on the credit
facilities of approximately $192,000,000. The 1997 period included
approximately $122,000,000 of proceeds from the issuance of the 8 3/4% Notes
and approximately $41,000,000 of net drawdowns on the credit facility offset
by approximately $99,000,000 used for the redemption of the 11 1/4% Notes.
-19-
<PAGE>
CAPITAL EXPENDITURES. The Company's expenditures for property
acquisition, exploration and development for the first nine months of 1998
and 1997 were as follows:
<TABLE>
<CAPTION>
Nine Months Ended
--------------------------------
September 30, September 30,
1998 1997
------------- -------------
(In Thousands)
<S> <C> <C>
Property acquisition costs:
Proved properties $297,440 5,259
Undeveloped properties 38,452 3,172
-------- ------
335,892 8,431
Exploration costs:
Direct costs 42,537 51,613
Overhead capitalized 2,561 2,533
-------- ------
45,098 54,146
Development costs:
Direct costs 57,728 48,889
Overhead capitalized 3,698 3,333
-------- ------
61,426 52,222
-------- ------
$442,416 114,799
-------- ------
-------- ------
</TABLE>
The Company's budgeted 1998 expenditures for exploration and
development (exclusive of property acquisition costs) are approximately
$130,000,000. The Company intends to meet its 1998 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.
INVESTMENT IN SAXON PETROLEUM INC. On June 25, 1998 Forest announced
that it agreed to acquire all of the approximately 49.8 million outstanding
common shares of Saxon not then owned by Forest in exchange for Forest Common
Stock on the basis of one share of Forest Common Stock for each 47 common
shares of Saxon. The transaction was approved by the minority shareholders of
Saxon on August 7, 1998 and by the Alberta Court of Queen's Bench on August
10, 1998. As a result, common shares outstanding increased by 1,081,256
shares and the minority interest was eliminated.
LONG-TERM SALES CONTRACTS. A significant portion of Canadian
Forest's natural gas production is sold through the ProMark Netback Pool. At
September 30, 1998 the ProMark Netback Pool had entered into fixed price
contracts to sell approximately 1.6 BCF of natural gas from October to
December 1998 at an average price of $2.02 CDN per MCF and approximately 2.5
BCF of natural gas in 1999 at an average price of approximately $2.63 CDN per
MCF. Canadian Forest, as one of the producers in the ProMark Netback Pool, is
obligated to deliver a portion of this gas. In 1997 Canadian Forest supplied
27% of the gas for the Netback Pool.
-20-
<PAGE>
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, 1998 the Company had natural gas swaps for an aggregate of
approximately 69 BBTU (billion British Thermal Units) per day of natural gas
during the remainder of 1998 at fixed prices ranging from $1.13 per MMBTU
(million British Thermal Units) on an Alberta Energy Company "C" (AECO "C",
U.S. $) basis to $2.55 per MMBTU on a New York Mercantile Exchange (NYMEX)
basis and an aggregate of approximately 74 BBTU per day of natural gas during
1999 at fixed prices ranging from $1.51 per MMBTU (AECO "C", U.S. $ basis) to
$2.36 per MMBTU (NYMEX basis). At September 30, 1998, the Company had an oil
swap for 300 barrels per day during the remainder of 1998 at a fixed price of
$20.52 per barrel.
Subsequent to September 30, 1998 the Company entered into six swaps
that hedge 25,000 MMBTU of natural gas per day from November 1998 to February
1999 at fixed prices ranging from $2.51 to $2.66 per MMBTU (NYMEX basis).
YEAR 2000 ISSUES. The Year 2000 issue results from computer programs
being written using two digits (rather than four) to define the applicable
year. As a result, certain of the Company's programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the
year 2000. This situation could result in system failure, miscalculations and
disruption of operations including, among other things, a temporary inability
to process transactions, operate equipment with date-sensitive computer
controls or communicate electronically with other parties.
The Company has instituted a Year 2000 Project that addresses the
effects the Year 2000 will have on software applications and analyzes
upgrades and purchases that may be required. In addition, the Year 2000
Project assesses the potential impact on the Company in the event that other
parties with whom the Company does business do not implement systems which
are Year 2000 compliant.
The Company commenced the date conversion portion of its Year 2000
Project in 1996, in conjunction with a review of the functionality of the
hardware and software in certain of its existing systems. Replacement of the
lease and land system with Year 2000 compliant software was completed in
early 1997. Review of systems solutions for the Company's primary business
applications, including those used for accounting, production reporting and
oil and gas reserve reporting, was completed during 1997 and early 1998.
Possible solutions explored by the Company included modification of existing
systems to make them Year 2000 compliant, replacement of existing systems
with new systems which were Year 2000 compliant and/or provided greater
functionality and, in certain areas, replacement of systems by outsourcing
processes to a third party.
The Company completed its review of accounting systems in early
1998, deciding to replace its U.S. accounting system with a new system that
will be Year 2000 compliant and also provide greater functionality. The
identification of necessary enhancements to the base product was completed in
mid-1998, after which the programming and data conversion processes
commenced. The project is approximately 25% complete as of October 31, 1998.
In Canada, the Company plans to upgrade to a newer release of its existing
oil and gas accounting software in order to be Year 2000 compliant. The
Company expects to be fully operational on its new accounting systems in both
the U.S. and Canada by mid-1999.
The Company is installing an updated version of its U.S. production
accounting software. The new version is Year 2000 compliant and also provides
greater functionality. Installation of this software commenced in mid-1998.
Completion of this project, which also requires updated interface programming
to the accounting and reserve systems, is expected to occur in early 1999.
The Company does not use an automated production reporting system in Canada.
The Company's U.S. oil and gas reserve database software will also
be updated to a version that is Year 2000 compliant. This upgrade, which
requires some revision to interface programming, is expected to be complete
by the third quarter of 1999. In Canada, the Company is in the process of
installing new oil and gas reserve software that is Year 2000 compliant; this
project is expected to be complete by the end of 1998.
The new systems described above are expected to make the Company's
business computer systems approximately 90% Year 2000 compliant by mid-1999.
Remaining business systems are in the process of being reviewed for Year 2000
compliance by Company personnel. To date, no significant instances of
noncompliance have been noted.
During the course of the projects described above, there has been
and will continue to be significant time requirements placed on the Company's
managers and staff in the the affected areas. Wherever possible, the Company
has contracted additional personnel to supplement programming efforts and to
"backfill" critical positions so that normal workflow is not adversely
affected. However, the ability of the Company's information technology staff
to respond to new issues is expected to be hampered during the upcoming year
due to the difficulty encountered in attracting and retaining qualified
personnel.
A Year 2000 Steering Committee was formed in early 1998 consisting
of representatives from the Finance, Accounting, Legal, Operations and
Information Systems disciplines. Based on the Committee's recommendations,
the Company has entered into contracts with several consultants to provide
additional support to its efforts to ensure Year 2000 compliance. In the
U.S., a national consulting firm has been engaged to assist in the
identification, classification and itemization of Year 2000 issues not
previously identified. This effort will encompass a review of all field
operations (operated and non-operated), significant vendor and customer
relationships and business systems not included in the projects described
above. The consulting firm will assist Company personnel in the assessment
and remediation of Year 2000 issues. The selection of the consulting firm
was completed in October 1998 and work will commence in November 1998.
Completion of this U.S. review is scheduled for mid-1999. In Canada, the
Company has engaged a consultant to review its business systems. The
Company's outside legal counsel in Canada has also been retained to provide
support to management in its review of third party relationships.
The total cost associated with implementation of the Company's
business systems for accounting, production reporting and oil and gas reserve
reporting during 1998 and 1999 are expected to be between $2,500,000 and
$3,000,000. Of this amount, approximately 20% to 30% is estimated to be
attributable to making the systems Year 2000 compliant, and the remainder is
for upgraded hardware and software. The cost of the reviews being undertaken
by outside consultants contracted by the Year 2000 Steering Committee in the
U.S. and Canada is expected to be $300,000 to $400,000.
Management believes that a failure to complete its Year 2000
compliance, or a failure by parties with whom the Company has material
relationships to complete Year 2000 compliance, could have a material adverse
effect on the Company's financial condition and results of operations. The
Company believes that it can provide the resources necessary to ensure Year
2000 compliance prior to 2000, and thereby reduce the possibility of
significant interruptions of normal business operations. The Company also
believes that a sufficient number of alternate customers and suppliers exist
if the Company's current customers or suppliers are delayed in their efforts
to achieve Year 2000 compliance.
The Company has not, to date, implemented a Year 2000 Contingency
Plan because it is the Company's goal to have major issues resolved by
mid-1999. If, however, the Company's Year 2000 Project falls behind schedule,
the Company would expect to develop and implement a Year 2000 Contingency
Plan by the end of March 1999.
-21-
<PAGE>
RECENT ACCOUNTING PRONOUNCEMENTS. In June 1997, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 131, Disclosures About Segments of an Enterprise and Related Information
(Statement No. 131), effective for years beginning after December 15, 1997.
Statement No. 131 establishes standards for reporting information about
operating segments and the methods by which such segments were determined.
The Company has not yet adopted Statement No. 131.
In February 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 132, Employers' Disclosures
about Pensions and Other Postretirement Benefits (Statement No. 132),
effective for years beginning after December 15, 1997. Statement No. 132
revises employers' disclosures about pension and other postretirement benefit
plans. It does not change the measurement of recognition of those plans. The
Company will comply with the reporting and display requirements of this
statement when required.
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities (Statement No. 133), effective
for fiscal quarters of fiscal years beginning after June 15, 1999. Statement
No. 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. The Company has not determined the
impact Statement No. 133 will have on its financial statements and believes
that such determination will not be meaningful until closer to the date of
initial adoption.
In March 1998, the American Institute of Certified Public
Accountants issued Statement of Position No. 98-1, Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use, (SOP 98-1)
effective for fiscal years beginning after December 15, 1998. SOP 98-1 sets
forth guidelines for capitalization of costs of software developed or
obtained for internal use, including internal costs. The Company has decided
to adopt the provisions of SOP 98-1 effective January 1, 1998. As a result,
the Company will capitalize a larger amount for systems development costs
related to its 1998 and 1999 systems implementations than would have
otherwise been the case.
-22-
<PAGE>
PART II. OTHER INFORMATION
Item 2c. Recent Sale of Unregistered Securities
- -----------------------------------------------
On August 10, 1998 the Company acquired the shares of Saxon not
owned by the Company for 1,081,256 shares of Common Stock. The transaction
was approved by the Alberta Court of Queen's Bench and was exempt from
registration under the 33 Act pursuant to Section 3(a) of the 33 Act.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
* 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 1998.
-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 16, 1998 /s/ Daniel L. McNamara
-------------------------------------
Daniel L. McNamara
Corporate Counsel and Secretary
(Signed on behalf of the registrant)
/s/ David H. Keyte
-------------------------------------
David H. Keyte
Executive Vice President and Chief
Financial Officer
(Principal Financial Officer)
-24-
<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
THROUGH 10 OF THE COMPANY'S FORM 10-Q FOR THE NINE MONTH PERIOD ENDED SEPT. 30,
1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 4,783
<SECURITIES> 0
<RECEIVABLES> 54,274
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 65,550
<PP&E> 2,011,742
<DEPRECIATION> 1,293,316
<TOTAL-ASSETS> 819,076
<CURRENT-LIABILITIES> 53,745
<BONDS> 510,294
0
0
<COMMON> 4,464
<OTHER-SE> 219,322
<TOTAL-LIABILITY-AND-EQUITY> 819,076
<SALES> 228,684
<TOTAL-REVENUES> 228,684
<CGS> 129,499
<TOTAL-COSTS> 144,691
<OTHER-EXPENSES> 214,023
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 28,429
<INCOME-PRETAX> (158,459)
<INCOME-TAX> (14,960)
<INCOME-CONTINUING> (143,499)
<DISCONTINUED> 0
<EXTRAORDINARY> 6,196
<CHANGES> 0
<NET-INCOME> (137,303)
<EPS-PRIMARY> (3.46)
<EPS-DILUTED> (3.46)
</TABLE>
