-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TKztWxnyxUWZFy+88K96n80q/19VdB4w240ZEMYJ0Z1j7jDBipHQRaoTt5f2sXRf 3pVJEvhjdUVM1ut1okm70g== 0001047469-98-041219.txt : 19981118 0001047469-98-041219.hdr.sgml : 19981118 ACCESSION NUMBER: 0001047469-98-041219 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FOREST OIL CORP CENTRAL INDEX KEY: 0000038079 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 250484900 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13515 FILM NUMBER: 98752311 BUSINESS ADDRESS: STREET 1: 1600 BROADWAY STREET 2: STE 2200 CITY: DENVER STATE: CO ZIP: 80202 BUSINESS PHONE: 3038121400 10-Q 1 10-Q - ------------------------------------------------------------------------------- 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 - ---------------------------------------------------------------------------- PART I. FINANCIAL INFORMATION FOREST OIL CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
September 30, December 31, 1998 1997 ------------- ------------ (In Thousands) 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 --------- --------- --------- ---------
See accompanying notes to condensed consolidated financial statements. -1- FOREST OIL CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF PRODUCTION AND OPERATIONS (UNAUDITED)
Three Months Ended September 30, Nine Months Ended September 30, -------------------------------- ------------------------------- 1998 1997 1998 1997 ---------- --------- ---------- --------- (In Thousands Except Production and Per Share Amounts) 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 --------- -------- --------- -------- --------- -------- --------- --------
continued on next page See accompanying notes to condensed consolidated financial statements. -2- FOREST OIL CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF PRODUCTION AND OPERATIONS (UNAUDITED) (CONTINUED)
Three Months Ended Nine Months Ended September 30, September 30, ---------------------- --------------------- 1998 1997 1998 1997 -------- ------- ------ ------ (In Thousands Except Production and Per Share Amounts) 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) -------- ----- ------ ----- -------- ----- ------ -----
See accompanying notes to condensed consolidated financial statements. -3- FOREST OIL CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended September 30, ------------------------------- 1998 1997 ------------- ------------- (In Thousands) 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
See accompanying notes to condensed consolidated financial statements. -4- 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:
Three Months Ended September 30, Nine Months Ended September 30, -------------------------------- ------------------------------- 1998 1997 1998 1997 ---------- -------- --------- -------- (In Thousands) 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) --------- -------- --------- -------- --------- -------- --------- --------
(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- 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- FOREST OIL CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 (UNAUDITED) (3) SUBSIDIARIES, CONTINUED
September 30, December 31, CANADIAN FOREST OIL LTD. 1998 1997 ------------- ------------ (In Thousands) 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 --------- --------- --------- --------- Nine Months Ended September 30, ------------------------------- 1998 1997 --------- --------- (In Thousands) 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 --------- --------- --------- ---------
(4) NET PROPERTY AND EQUIPMENT Components of net property and equipment are as follows:
September 30, December 31, 1998 1997 ----------- ---------- (In Thousands) 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 ----------- ---------- ----------- ----------
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- 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:
September 30, December 31, 1998 1997 ------------- ------------ (In Thousands) 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 -------- ------ -------- ------
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:
September 30, December 31, 1998 1997 ------------- ------------ (In Thousands) 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 ---------- ------- ---------- -------
-8- 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- 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:
Three Months Ended Nine Months Ended September 30, September 30, --------------------- -------------------- 1998(1) 1997(2) 1998(1) 1997(3) --------- -------- -------- -------- (In Thousands Except Per Share Amounts) 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) --------- ------- -------- ------- --------- ------- -------- -------
(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- 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- 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:
Three Months Ended September 30, 1998 --------------------------------------------------------------- Offshore Onshore Gulf of Gulf Total Total Mexico Coast Western U.S. Canada Company ------- -------- -------- ------- ------ ------- 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 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
(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-
Three Months Ended September 30, 1997 ----------------------------------------------------------------- Offshore Onshore Gulf of Gulf Total Total Mexico Coast Western U.S. Canada Company -------- ------- ------- ----- ------ ------- 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 ------- ----- ----- ------ ------ ------ ------- ----- ----- ------ ------ ------
(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- 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- 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:
Nine Months Ended September 30, 1998 ----------------------------------------------------------------- Offshore Onshore Gulf of Gulf Total Total Mexico Coast Western U.S. Canada Company -------- ------- ------- ----- ------ ------- 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 -------- ----- ----- ------ ------ ------ -------- ----- ----- ------ ------ ------
(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-
Nine Months Ended September 30, 1997 ----------------------------------------------------------------- Offshore Onshore Gulf of Gulf Total Total Mexico Coast Western U.S. Canada Company -------- ------- ------- ----- ------ ------- 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 ------- ----- ----- ------ ------ ------ ------- ----- ----- ------ ------ ------
(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- 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:
Three Months Ended Nine Months Ended September 30, September 30, -------------------- ------------------- 1998 1997 1998 1997 ------- ----- ------ ------ (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 ------- ----- ------ ------ ------- ----- ------ ------
(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- 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- 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- CAPITAL EXPENDITURES. The Company's expenditures for property acquisition, exploration and development for the first nine months of 1998 and 1997 were as follows:
Nine Months Ended -------------------------------- September 30, September 30, 1998 1997 ------------- ------------- (In Thousands) 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 -------- ------ -------- ------
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- 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- 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- 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- 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- EX-27 2 EXHIBIT 27
5 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. 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 4,783 0 54,274 0 0 65,550 2,011,742 1,293,316 819,076 53,745 510,294 0 0 4,464 219,322 819,076 228,684 228,684 129,499 144,691 214,023 0 28,429 (158,459) (14,960) (143,499) 0 6,196 0 (137,303) (3.46) (3.46)
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