Forest Oil Shares Plunged: What You Need to Know

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Forest Oil (NYS: FST) fell more than 11% in early trading after offering 2012 guidance that disappointed investors. Shares of peer Clayton Williams Energy (NAS: CWEI) , which, like Forest, spends considerable resources exploring Texas and Louisiana, also fell.

So what: Cash flow appears to be the issue. In a press release, Forest management projected $550 million to $600 million in capital budget needs and then went on to say the total would be "near discretionary cash flow at current commodity prices." There's enough wiggle room in the phrasing to suggest that, if commodity prices don't hold up, Forest Oil could run cash flow negative.

Now what: Investors have apparently been concerned about this dynamic for a while. Last quarter, management said it was in the process of developing some "new oil concepts" that would require substantial capital investment in 2011 but not as much next year. The implication? Cash flow and capital expenditures would be more "in line" in 2012, Chief Financial Officer Michael Kennedy told analysts last month. Now it seems that may not be the case. Do you agree? Let me know what you think using the comments box below.

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At the time thisarticle was published Fool contributor Tim Beyers is a member of theMotley Fool Rule Breakersstock-picking team. He didn't own shares in any of the companies mentioned in this article at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Google+ or Twitter, where he goes by @milehighfool. You can also get his insights delivered directly to your RSS reader.Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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